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Perspectives Podcast

Welcome to the B|O|S Perspectives Podcast - a new podcast featuring the latest content from Bingham, Osborn & Scarborough. Please read important disclosures and index definitions here.


42.  B|O|S Flash Briefing: IRS Guidance on Clawback of Gift & Estate Tax Exemption

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When the gift and estate tax exclusion amount was increased under the 2017 Tax Cuts and Jobs Act, taxpayers and their advisors questioned what would happen if large lifetime gifts were made during the years of the increased exemption amount, which are 2018–2025, and death occurred after the gift and estate tax exclusion amount reverted to lower levels in 2026 and beyond. This is commonly referred to as the “clawback” question.

In November 2019, the IRS published final regulations that provided guidance needed for taxpayers to make fully informed tax decisions about lifetime gifts. The following Q&A address how the regulations affect gift and estate tax calculations.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode provides IRS guidance on what taxpayers and their advisors commonly refer to as the “clawback” question and was written by B|O|S Estate Planning Advisor Judith Gordon.

When the gift and estate tax exclusion amount was increased under the 2017 Tax Cuts and Jobs Act, taxpayers and their advisors questioned what would happen if large lifetime gifts were made during the years of the increased exemption amount, which are 2018–2025, and death occurred after the gift and estate tax exclusion amount reverted to lower levels in 2026 and beyond. This is commonly referred to as the “clawback” question.

In November 2019, the IRS published final regulations that provided guidance needed for taxpayers to make fully informed tax decisions about lifetime gifts. The following Q&A address how the regulations affect gift and estate tax calculations.

Who is impacted by the final anti-clawback regulations?

Individuals who make lifetime gifts after 2017 and die after 2025.

What are the estate tax consequences if an individual gifts the full exclusion amount by December 31st, 2025?

The anti-clawback regulations clarify that in the case of a donor who makes lifetime gifts when the increased exclusion amount is in effect and dies after 2025 when the increased exclusion amount reverts to the 2017 level of $5 million indexed for inflation, the decedent’s estate will not claw back the excess.

In other words, if an individual makes an $11.58 million gift in 2020 and dies in 2026, the exclusion used in calculating the unified gift and estate tax for estate tax purposes will be $11.58 million, not $5 million, adjusted for inflation.

What are the estate tax consequences if an individual gifts a partial exclusion amount by December 31st, 2025?

If an individual makes a lifetime gift that is less than the full increased exemption amount but greater than the exclusion amount in effect at death, there will be no recapture of the increased exclusion benefit.

For example, if an individual makes a gift of $8 million in 2020 and dies after 2025 when the exclusion amount has reverted to $5 million adjusted for inflation, the individual’s estate will get the benefit of the estate tax exclusion of $8 million, not $5 million, adjusted for inflation.

What are the estate tax consequences if an individual does not gift either a full or partial exclusion amount greater than the exclusion amount in effect at death by December 31st, 2025?

If an individual makes a lifetime gift that is less than the exclusion amount in effect at death, there will be no additional benefit.

For example, if an individual makes a gift of $3 million in 2020 and dies after 2025 when the exclusion amount has reverted to $5 million adjusted for inflation, the individual’s estate will get only the benefit of the $5 million exclusion adjusted for inflation.

As demonstrated above, the increased exclusion amount, adjusted for inflation, is a “use it or lose it” benefit and is available to a decedent who survives the increased exclusion period only to the extent the decedent used it by making lifetime gifts during the increased exclusion period that exceeded the exemption amount available at date of death.

How does the new guidance affect the portability exception?

There is one exception to the rule for married couples. The final regulations also clarified that for spouses who elected portability during this increased exemption time, the full increased exemption amount for the first-to-die spouse will increase the exclusion available to the surviving spouse.

For example, if the first spouse dies in 2020 when the basic exclusion amount is $11.58 million and the surviving spouse elected portability, when the surviving spouse dies after 2025, he or she will have his or her available exclusion, $5 million indexed for inflation, and the first-to-die spouse’s exclusion amount, $11.58 million, to offset estate taxes.

Is there final guidance about the clawback of allocated generation-skipping exclusion amounts?

The November regulations did not provide final guidance as to whether the sunset of the increased exemption amount for generation-skipping purposes will impact allocations of generation-skipping exemptions made during this increased exemption period. The IRS ducked and stated that a final ruling on that matter is beyond the scope of the regulations.

If you are interested in learning more about lifetime gifting opportunities, please contact a member of your B|O|S wealth management team to review your financial situation.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

41.  B|O|S Flash Briefing: September 21, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, September 23rd, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

The U.S. stock market continued to take a pause from the strong rally that took place for most of the late spring and summer. As of the close of September 21st, the S&P 500 Index is down approximately 8% from the all-time high it reached on September 2nd. The index has now declined for three consecutive weeks for the first time since the rally began in late March. The technology-heavy NASDAQ 100 Index recently entered correction territory and is down approximately 11% from its all-time high reached on August 31st.  Recent declines have been driven by increased pessimism about the U.S. economic recovery.  The Federal Reserve announced last week that it expects to keep the Fed Funds rate near zero through 2023 and revised its 2020 GDP growth forecast higher than the previous estimate. These announcements were broadly expected by analysts. The surprise, however, came during Chairman Powell’s press conference when he stated that there were “significant risks” to their GDP forecast. Specifically, he mentioned that the revised forecast assumed that Congress would pass another coronavirus stimulus package. Negotiations for a new stimulus bill have recently stalled and future progress is in question given the recent passing of Supreme Court Justice Ruth Bader Ginsburg. The expected battle to fill this new vacancy is likely to command more attention from Congress than the stimulus package over the coming weeks.

Increased tensions between China and the U.S. have also led to increased investor pessimism. Tensions between the two countries rose recently after President Trump suggested two popular social media apps which are owned by companies in China would be banned from the U.S. unless they were purchased by a U.S. company. The President cited national security concerns as the reason for the decision.  Over the weekend, a tentative deal was announced that would have Oracle and Walmart purchase stakes in a new U.S.-based version of Tik Tok. Unfortunately, the details of the deal were not confirmed by authorities in China which has led to some confusion. Possibly in retaliation, China announced a new plan to penalize individuals or companies it deems “unreliable entities”. Such entities can be subject to fines, trade sanctions, or investment restrictions. The Chinese government did not include a list of these “unreliable entities” in the announcement.

The market for initial public offerings (IPOs) started very slowly earlier this year but has ramped up as the demand for tech stocks has increased. And nowhere was that more evident than the Snowflake IPO that began trading last week. Snowflake is a data management company specializing in cloud software. This is a real company with real revenues and the high projected growth rates made it one of the most sought after IPOs in recent memory. In the weeks leading up to the IPO, the expected price range rose from $75-$85 per share originally to $100-$110 per share. The actual IPO price turned out to be $120 and on its first day trading on September 15th, the stock reached a high of $319 per share before settling down to about $254 at the close. Snowflake ended the day with a market value of over $70 billion which is approximately the same size as Target and Goldman Sachs. Among the winners in the Snowflake IPO, surprisingly, was Warren Buffett’s Berkshire Hathaway which uncharacteristically invested about $700 million in the company before the IPO. Before you get too excited about trying to participate in the next hot IPO, just know that many do not work out like this one. In fact, two of the largest IPOs during the last two years have been Uber and Lyft and those are down 19% and 60% respectively since their IPO dates.

Flash Briefings will be taking next week off due to vacation, but will return the week of October 5th.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the NASDAQ 100 Index, which is a modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. An index is unmanaged and not available for direct investment.

40.  B|O|S Flash Briefing: September 14, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, September 16th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks declined for the week ending September 11th. It was the second consecutive week of declines for the S&P 500 Index and the first consecutive weekly decline that the index has experienced since last April. As of the close of September 14th, the S&P 500 is now down approximately 3% for the month of September and high-flying technology stocks that led the rally continue to lead the declines.  The technology-heavy NASDAQ 100 Index is now down about 7% over the same period.  Apple and Microsoft, the two largest U.S. companies in the S&P 500, are down 11% and 9% respectively the first 14 days of September, but are still up sharply for the year.

The recent decline in U.S. stock prices has significantly reduced the spread between U.S. and foreign stock performance for the year. On September 2nd, the S&P 500 was outperforming foreign stocks (as measured by the MSCI ACWI ex US Index) by almost 15% for the year. Since September 2nd, foreign stocks have outperformed sharply, cutting the spread almost in half. The decline in U.S. technology stocks accounts for a large part of the reduction in the performance spread because technology has a much greater weight in U.S. indexes. The technology sector currently has a weighting of about 28% in the S&P 500 Index and a weighting of only about 11% in the MSCI ACWI ex US Index.

Are your kids trading options? Recent data show that volume in the options markets is hitting record levels. A recent report by the Chicago Board Options Exchange (CBOE) showed option volumes up 92% from one year ago. Some of the increase in volume has been attributed to large investors such as the recent disclosure by SoftBank Group of their $4 billion options bet on technology stocks, but much of the increased activity has been attributed to much smaller investors. Data from the Options Clearing Corporation (OCC) show that smaller investors bought a notional value of $500 billion worth of call options in August. That number is approximately five times higher than the previous monthly record for call buying in smaller accounts. Many options brokers now offer easy and free access to options markets with very low minimums. This has led to the growth of many young speculators who are willing to bet the small amounts they have on the continued rise in the best performing technology stocks. If they are right, buying a call will result in a larger gain than if they just bought the stock. If they are wrong, they lose their entire investment. The increased amount of call buying can have an impact on the stock market as a whole as options market-makers who are selling the calls need to buy the underlying stock to hedge themselves. It will be interesting to see if the higher call buying trend continues now that technology stocks have had their first correction since the rally began in late March.

The U.S. Federal Reserve will meet this week for the first time since late July. No significant changes in policy are expected; however, investors will be looking for some potential clarity on the recent changes to their inflation targeting policy. Chairman Powell announced in August that the Fed will be targeting an average inflation rate of 2% instead of the previous hard target of 2%. That sounds like a small change but suggests that interest rates may stay lower for much longer even if inflation begins to increase. The Fed was not precise about the time period they would be considering when looking at the average inflation rate and there are sure to be many other questions about the policy during the Chairman’s press conference after the meeting has concluded.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the NASDAQ 100 Index, which is a modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. Finally, the episode also referenced the MSCI ACWI ex US Index, which is a market capitalization-weighted index that captures large and midcap companies in developed and emerging market countries excluding the U.S. An index is unmanaged and not available for direct investment.

39.  The State of the Firm

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We hope you and your loved ones remain safe and healthy in what has been a most challenging year in so many respects. As 2020 marks the 35th anniversary of Bingham, Osborn and Scarborough, we thought it would be helpful to provide a thorough update on the state of the firm in a variety of different areas.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode provides a current snapshot of our firm, Bingham, Osborn & Scarborough.

We hope you and your loved ones remain safe and healthy in what has been a most challenging year in so many respects. As 2020 marks the 35th anniversary of Bingham, Osborn and Scarborough, we thought it would be helpful to provide a thorough update on the state of the firm in a variety of different areas.

Acknowledging Our Founders

We want to begin by recognizing our founding Principals Bob Bingham, Ed Osborn, and John Scarborough. Though they retired many years ago, their core values and spirit continue to live on at B|O|S. Such values and principles such as putting our client’s interests first, understanding our client’s financial picture before recommending investments, valuing knowledge and education, being transparent about fees and expenses, giving back to others and the community, and treating others with respect, continue to guide the firm even in their absence.

The Firm at a Glance

As of 8/31/20, B|O|S has 46 employees with offices in San Francisco and Redwood City.   The firm recently surpassed $5 billion in assets under management for about 700 families and institutions. While most B|O|S clients reside in the greater Bay Area, our client base has expanded throughout the country (and some abroad). B|O|S itself and members of our team continue to be recognized in the industry and media. We are pleased to have developed the experience and depth of a much larger firm while maintaining the deep relationships of a small-to-midsized firm.

Health of the Firm

Despite the challenges that COVID has presented, our team remains safe and healthy and working effectively. Most of our employees will continue to work remotely until 2021 but many will continue to use our offices as necessary. The investments we had made in technology prior to 2020 helped us transition successfully to this new environment and the firm is functioning smoothly.

We are proud to have maintained all of our employees despite the very rapid selloff in the stock market and decline in revenues at the end of the first quarter.

We believe you benefit from the long tenure and low turnover of our team. We recently celebrated numerous 5, 10, 15 and 20-year anniversaries and are grateful for our employees’ dedication and loyalty to our clients and the firm.

Ownership

Our ten active Principals and four retired founders and Principals own a substantial majority of the firm’s equity with Kudu Investments owning a minority interest. Kudu maintains no involvement in the operations of the firm and does not have a seat on our Board of Managers. The decision to repurchase the firm in 2018 has proven to be a good one in hindsight. Among other things, it has enhanced our recruiting efforts and retention while reducing significantly the administrative time and expense associated with being owned by a publicly traded company.

Firm Initiatives / Focus Areas

The firm continues to work aggressively towards the achievement of several internal initiatives to enhance your experience and maintain a strong internal culture. Here are just a few examples:

Technology and Cybersecurity

We continue to commit substantial time and resources to the enhancement of our internal and client facing technology and to the management of cybersecurity risk. Currently, we are designing and implementing an upgraded client reporting and portfolio accounting system.  Our clients will benefit from improved and more visually attractive reporting and an enhanced client portal experience. We look forward to sharing more details about this change soon.

Cybersecurity remains an important area of focus and we regularly work with trusted experts to minimize vulnerabilities to the extent possible. Our technology infrastructure includes industry tested, reputable and certified software, a layered security approach, continuing education for employees, backup systems with redundancy, and ongoing testing and assessments.

Investments

There have been many challenging investment environments in our 35-year history but the current environment is certainly among the most difficult. These challenges include: extremely low interest rates, uncertainty created by COVID and the upcoming elections, lofty prices/valuations of US mega cap tech stock vis-à-vis other companies in the global stock market and the potential for rising inflation in the future due to unprecedented monetary expansion and stimulus over the past 10 years, among others.

We believe strongly that the fundamental tenets of our approach – broad diversification, discipline, focus on lowering costs and taxes, academically driven principles and common sense about the risks and opportunities on the horizon – endure in this environment. We also continue to consider ways to enhance our approach and to customize portfolios to the needs and preferences of our clients. This includes evaluating potential new investments to add to our portfolios that may enhance return or reduce risk, better meet the social and environmental preferences of our clients, reduce taxes or drive the overall costs of the portfolio down.

Wealth Planning and Advising

Given the challenges described above, we believe it’s more important than ever to plan carefully for the future, to protect against potential risks, and to take advantage of opportunities that arise.

We are designing and implementing new wealth planning software that increases the sophistication of our cash flow modeling and allows for more real-time adjustments during client review meetings. We have deepened our expertise in specific planning areas such as estate planning, insurance and other areas and will look to continue adding expertise in the future.  All of this is in addition to the ongoing education we provide to our advisors to keep up on the latest planning techniques and strategies. We look forward to advising you of any tax law or other changes that may occur following the November election.

Communications

We are always looking for new and different ways to communicate with you. Earlier this year we were pleased to launch the Perspectives Podcast. It includes over 30 podcasts on a variety of subjects and weekly flash briefings on the economy and financial markets. If you haven’t listed to one yet, we encourage you to visit our podcast page.

Culture and Values

Current events have challenged us to live up to our stated principles. We have worked consciously over the years to maintain and grow the diversity of our team but we realize that we have work to do to promote greater diversity within the firm and our industry. Recently, a dedicated group of our employees and Principals formed an internal committee called “Team Human” focused on diversity, equity and inclusion. Team Human has crafted a mission to increase knowledge and awareness, develop programs for training and education, promote long-term, internal and industry change and support our community through charitable contributions. We are excited about their efforts to date and expect them to make meaningful impact.

Community and B|O|S Foundation

B|O|S continues to be active in our community. Many of our team members play leadership roles in such organizations as the Food Bank of Contra Costa and Solano, Edgewood Center for Children, Stanford University, United Religions Initiative and others. In addition, we help facilitate our client’s philanthropy via the B|O|S Foundation.

The B|O|S Foundation is a donor advised fund administered in cooperation with the Marin Community Foundation It is a way for our clients to manage their charitable giving while retaining the benefits of B|O|S’s investment management expertise.  As of this writing, B|O|S clients have balances of over $30 million in B|O|S Foundation donor advised accounts and made almost 500 grants totaling $3.5 million last year. Since BOSF’s inception in late 2004, B|O|S Foundation clients have made almost 5,000 grants to charities totaling over $22 million.

As this is an extraordinarily difficult time for so many across the country and globally, we encourage you to talk with your B|O|S team about ways to maximize your charitable giving impact.

Feedback

We are grateful for the opportunity to advise you. Our mission is to understand what truly matters to you and to be a thoughtful steward of your complete financial picture. To the extent you think we can do anything better or differently, please contact us directly at (415) 781-8535 or via our email addresses below.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

38.  B|O|S Flash Briefing: September 7, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, September 9th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks have taken a breather from the torrid rally that has occurred over the last few months and many of the stocks and sectors that have been the strongest have had the sharpest declines. The rally hit its peak on Wednesday, September 2nd with the market celebrating new all-time highs for the S&P 500 Index and the NASDAQ Composite Index surpassing 12,000 for the first time in history. Since then, through Tuesday, September 8th, the S&P 500 Index is down approximately 7% and the technology-heavy NASDAQ is down approximately 10%. The largest companies in the U.S., which have been driving the recent gains, have also fallen more than the broad index during this recent decline. Shares of Apple, the world’s largest company by market capitalization, dropped 8% on September 3rd which equates to a decline of approximately $180 billion in market value and the largest one-day loss of value by a company in history. Apple’s one-day loss of $180 billion in market value was greater than the combined total value of the 470 smallest stocks in the S&P 500 Index. Another recent high-flyer, Tesla, dropped 21% on September 8th which was its largest one-day loss in history. The decline in Tesla was attributed to the recent announcement by the S&P index committee that it would not be adding the company to the S&P 500 Index during its quarterly rebalance. No need to shed a tear over either of these companies’ recent results, however, as Apple is still valued at close to $2 trillion and Tesla’s stock is still up about 300% so far this year.

There did not appear to be any specific catalyst for the sell-off that began last week and of course no one knows at this point whether this is a short-term dip or signs of a new trend. Most analysts believe that the market had reached valuations that would be hard to maintain, particularly in the stocks that have been strongest this year. But some analysts believe that the high-flying stocks of 2020 are rallying for a reason and see this recent selloff as just a correction in a continuing bull market. Long-term investors should not be particularly concerned one way or the other as these are short-term concerns that do not warrant any adjustment in your long-term investment plan. As of the close of September 8th, the S&P 500 Index was up approximately 4% for the year.

Recent U.S. economic data show the economy continues to improve, but there are concerns that the pace of improvement may be slowing. The U.S. jobs report for August showed employers adding 1.4 million jobs last month and an unemployment rate of 8.4%. Some of the rise in jobs was due to temporary hires related to the U.S. census and the pace of rehiring in the worst-hit sectors like leisure and hospitality appears to be slowing. The number of long-term unemployed also continues to grow. In other economic news, the U.S. Congressional Budget Office announced that the federal debt is expected to exceed 100% of GDP during the next fiscal year which starts on October 1st. U.S. federal debt is currently 98% of GDP and is the highest it has been by that measure since World War II. The U.S. debt hit an all-time high of 106% of GDP in 1946 after years of funding the war effort. High economic growth after the war slashed the debt to 54% of GDP by 1960. That is not expected to happen this time. The good news is that the current low interest rate environment makes the debt cheaper to service and the global demand for U.S. treasuries has remained high throughout the pandemic.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the NASDAQ Composite Index, which is a market capitalization-weighted index of common equities listed on the Nasdaq stock exchange. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An index is unmanaged and not available for direct investment.

37.  Wealth Building Checklist for Successful 30-Somethings

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It wasn’t that long ago that I was in my 30s. During those years, I built a career, bought a home, had children, made some good decisions, made some not-so-good ones, and survived a historic financial crisis. With the benefit of hindsight, here are 10 things I learned during those years about building wealth that may be useful for someone in their 30s.

Show Notes:

The following are important footnotes from this episode:

1 This return is for illustrative purposes only and is presented only for the limited purpose of providing a sample illustration. Any sample illustration is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond B|O|S’s control. Any sample illustration is not reflective of any actual investment purchased, sold, or recommended for investment by B|O|S and are not intended to represent the performance of any investment made in the past or to be made in the future by any portfolio managed or advised by B|O|S. Actual returns may have no correlation with the sample illustration presented herein, and the sample illustration is not necessarily indicative of an investment that B|O|S will make. It should not be assumed that B|O|S’s investment recommendations in the future will accomplish its goals or will equal the illustration provided herein. Past performance is no guarantee of future returns.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode shares wealth building suggestions for individuals in their 30s and was written by B|O|S Chief Executive Officer Kevin Dorwin.

It wasn’t that long ago that I was in my 30s. During those years, I built a career, bought a home, had children, made some good decisions, made some not-so-good ones, and survived a historic financial crisis. With the benefit of hindsight, here are 10 things I learned during those years about building wealth that may be useful for someone in their 30s.

# 1. Build your career and invest in yourself.

Unless you are planning on receiving a big inheritance or winning the lottery, the wealth you build will depend entirely on what you earn and save. And, what you earn is dependent on your skills, abilities, and unique expertise. It’s always valuable to invest in yourself but it’s particularly important when you are in your late 20s and early 30s. Once you get into your career and family life, it can be challenging to find the time for these endeavors. Although some people debate the merits of graduate school, obtaining an MBA was extremely helpful toward advancing my career. Moreover, other investments in myself such as participating in leadership development at Dale Carnegie Training and learning public speaking skills with Toastmasters were particularly impactful in hindsight. No matter what your profession is, there are likely many ways to increase your earnings through investments in yourself. That said, there are also degrees and licenses that are costly and likely to have no impact on your future earnings. Choose wisely.

#2. Put savings on automatic.

Budgeting is really hard to do successfully and consistently. I’m all in favor of budgeting; however, the best way to ensure that you save for the future is to put your savings contributions on autopilot. Make sure you contribute to your 401(k) plan at work even if it feels like your cash flow is tight. At a minimum, make sure you put enough away to get the company match. Save additional funds by directing a percentage of your paycheck to an investment account or Roth IRA. Many custodians such as Schwab, Fidelity, or Vanguard have programs to automatically invest these savings on a periodic basis. Before you know it, these ongoing savings can really add up. Choose a low cost, diversified fund such as a Vanguard LifeStrategy Fund or Schwab MarketTrack Portfolio that has a long-term growth orientation to make things easy. Saving can be tough when your cash flow feels tight, but you cannot get these years back and not saving when you are younger will make it difficult to build your nest egg.

#3. Work toward critical mass

It can be frustrating when you are first starting out with a savings plan because it may feel like you are making little progress. Even if you have a positive year with your investments, it may not seem like your wealth is really increasing that much. For instance, let’s say you managed to accumulate $50,000 of savings. You have an unusually good year with your investments and manage to earn a 10% return1 for a $5,000 increase in value, bringing your savings to $55,000. Not too shabby. However, now assume instead that you have $1,000,000 of savings and you earn 10% — your investments go up by $100,000! That’s critical mass — the idea that it’s easier to accumulate money when you have more of it. For most people, getting to critical mass with your savings can take a long time. That’s why it’s so important to start early, to save regularly, and to maintain discipline with your investments.

#4. Watch for lifestyle creep.

One of the things I have observed as a financial planner is that it is very difficult to change one’s lifestyle later in life. Trying to downsize in your 60s and 70s is a lot harder than staying rightsized in your 30s and 40s. What one person views as a “necessity” really depends on what they have become accustomed to over time. It’s completely understandable and normal to want to increase your standard of living as you earn more; however, when your income increases through promotions or a new job, use that as an opportunity to increase your savings before you begin spending on other things.

#5. Manage debt wisely.

When used wisely, debt can be helpful toward building wealth over time. When used poorly, it can be destructive and can potentially put you in a bind.

A responsible use of debt is when it helps you achieve something in the future that you might not have been able to achieve otherwise. For example, using debt to buy a home that you intend to live in for a long time can be a good use of debt. Typically, under a fixed-rate mortgage, your mortgage payments stay fixed for the life of the loan whereas rent payments typically increase. As time goes on, the fixed mortgage payments will be potentially more affordable than the rent on a similar home. Using debt to fund education can also be a good use, particularly if it allows you to increase your potential earnings. With any use of debt, you want to be thoughtful about how much debt you really need to use and how the debt is structured. As we know from the 2008–2009 financial crisis, there were many people who paid too much for their homes, didn’t make a big enough down payment, or used exotic adjustable-rate mortgages. We know how that story ended.

Bad debt is debt that funds spending today that you could not otherwise afford, causing you to have to borrow from your future self. Examples of this include loading up your credit card to pay for an expensive vacation or a new television without the ability to pay it down in the near future. With many credit card companies charging 15%–20% interest rates, the debt continues to grow, making it harder to pay off. Another example is financing a fancy new car purchase when you could easily make do with a less expensive or perhaps used vehicle.

#6. Get some basic investment and financial knowledge.

Whether you find investments interesting or not, you owe it to yourself to make a minimum investment of time in some basic financial education. You may ultimately choose a financial advisor or use an investing service, but how will you be able to decipher between a good advisor and a bad one if you don’t have some basic knowledge? If you have a limited amount of time to read, I recommend The Investment Answer by Daniel C. Goldie and Gordan S. Murray. If you have a little more time and patience, The Four Pillars of Investing by William J. Bernstein is one of my favorites and an excellent primer on investing. For more general knowledge on building wealth, I recommend Die Broke by Stephen M. Pollan and Mark Levine and The Millionaire Next Door by Thomas J. Stanley and William D. Danko.

#7. Find good deals.

Admittedly, I wasted a lot of opportunities in my 30s to take advantage of deals and loyalty programs simply out of laziness. If you are good about paying off your credit card balances, there are some really attractive credit card offers available. Although some people like earning miles, I find cash back to be the most beneficial – see my colleague’s article Cash, Not Miles. Had I made most of my purchases using a cash-back card as I do now, I could have earned 3%–5% back over a long period of time. Other missed opportunities include not signing up for loyalty programs when staying at hotels, booking airline travel, etc. Many of these programs can be quite valuable over time and elevate your style of travel without a major increase in cost.

#8. Avoid big mistakes.

It only takes one really bad financial decision to set you back many years. This can include such things as: making a big investment in something you don’t really understand; failing to diversify out of your company stock because you think it can never go down in value; buying way more home than you can afford and then losing your job without having an emergency reserve; and overspending on credit cards and racking up huge levels of debt. Of course, there are many other possibilities, but these are some of the most common mistakes people make. Many of them are born out of greed, overconfidence, or lack of awareness. Building wealth is a slow, steady, and often mundane process that takes a long time.

#9. Take care of yourself.

You are your most valuable asset. Good eating habits, regular exercise, and meditation, while seemingly not financial in nature, can have a major impact on your financial life. For one, these habits can lead to greater productivity and better relationships, which undoubtedly can impact your potential earnings. Second, they may prevent future medical issues, which could keep you away from work temporarily or permanently. Building a career and juggling a busy family life can be overwhelming and it can feel like there is no time for yourself. Budgeting time for yourself (no pun intended) is paramount to keeping a positive attitude and mindset.

#10. Find the right advice.

Let me be clear: not everyone needs a financial advisor. Someone with the time, knowledge, and commitment can certainly manage their own finances and investments. However, don’t be penny wise and pound foolish. If you lack any of the ingredients just mentioned, hiring a good financial advisor can be very valuable even if just for the discipline he or she can bring. Several studies, including one from Vanguard titled “Advisor’s Alpha,” show that those who work with an advisor typically grow their wealth more than those who do not. Even though I am a perfectly fine gardener, I’m pretty sure my garden would be in complete disarray if I had not hired a professional to assist me. There are differing levels of financial advice; if you do not have a lot of assets to begin with, you might consider a robo-advisor or digital wealth manager such as Schwab, Fidelity, Vanguard Personal Advisor Services or digital advisors such as Personal Capital . As your assets grow and you desire a greater level of service and sophisticated advice, consider moving to an advisor who has that skillset.

If you are listening to this as a 30-something, I envy you. The 30s were years I will always appreciate. But, they will come to an end. I hope this advice sets you up for a more fruitful and enjoyable financial life thereafter.

Please see the show notes for important footnotes from the original article, “Wealth Building Checklist for Successful 30-Somethings”.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

36.  B|O|S Flash Briefing: August 31, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, September 2nd, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks continued to grind higher and make new all-time highs as the pace of new COVID-19 infections began to moderate and optimism increased for a vaccine. The S&P 500 Index closed at a new high on each of the five days for the week ending August 28th. A string of new all-time highs for all five days in a week had previously only happened twice over the last 22 years. The S&P 500 Index earned approximately 7% in August which will be the fifth consecutive month the index has had a positive return. The recent run of new highs has some short-term investors concerned about the prospects for stocks heading into September, which has historically been one of the worst months for stocks. Those concerns have been compounded as we hit the homestretch for what will be a very contentious election. Longer-term investors, however, should not concern themselves with what could occur over very short timeframes as short-term stock returns are impossible to predict with any consistency. But for those who are curious, returns on the S&P 500 were positive in September for each of the last three years and the index declined about 2% during the two months before the contentious election of 2016.

U.S. Fed Chairman Jerome Powell announced a significant change to Fed policy during their recent annual symposium last week. The Chairman announced that the Fed would officially drop its hard inflation target of 2%. The Fed suggested that the hard target had become obsolete and that they would instead focus on maintaining a long-term average inflation rate of 2%. That may not sound like a significant difference; however, this means that the Fed could continue to keep rates close to zero for a period of time even if inflation picks up sharply. U.S. stocks rose on the news and bonds sold off. Treasury Inflation Protected bonds (TIPS) rallied and are now up approximately 9% for the year.

The 124 year-old Dow Jones Industrial Average announced changes to the composition of the index last week. The changes were necessary to preserve the weighting of technology stocks in the index after Apple announced its pending stock split. The index will be adding Salesforce.com, Amgen, and Honeywell while simultaneously dropping ExxonMobil, Pfizer, and Raytheon. The addition of Salesforce.com received a lot of attention from media and traders but the deletion of ExxonMobil seems more noteworthy from a historical perspective. ExxonMobil joined the index in 1928, then called Standard Oil of New Jersey, and was the longest tenured company in the index. As recently as 2013, ExxonMobil was the most highly-valued company in the United States with a market value of approximately $450 billion. Now, the company is worth about $180 billion as oil prices have fallen and alternative sources of energy have risen in prominence.  The entire energy sector of the U.S. stock market has shrunk in recent years. The energy sector accounts for only about 2.5% of the S&P 500 Index, down from 12% in 2011. The sector is now so small that it is represented by only one company in the Dow Jones Industrial Average. That company is Chevron, which was added back to the index in 2008 after being dropped in 1999. The company now with the longest tenure in the Dow is Procter and Gamble, which was added to the index in 1932.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the Dow Jones Industrial Average, which is a price-weighted index that tracks 30 large, publicly traded U.S. companies trading on the New York Stock Exchange and the NASDAQ. An index is unmanaged and not available for direct investment.

35.  The True Value of Homeowners Insurance

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It’s fairly easy to fall into the cycle of buying a homeowners insurance policy when you purchase your home and then paying the premium each year without giving much additional thought to the policy’s design. When a claim arises, however, the policy details make all the difference in how much protection is provided and whether the claim experience is a good one. The details of a homeowners insurance policy are important. By understanding these details, policyholders can be better equipped to choose a policy that makes the most sense for them. Let’s start by asking some basic questions.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode covers three homeowners insurance policy valuation options and was written by B|O|S Director, Wealth Management Peter Yoon.

I have a vivid memory from the morning of Monday, October 9, 2017. As I stepped out of my home in San Francisco to begin the work week, I noticed a heaviness in the air. The normal sky had been replaced by a ceiling of smoke and the unmistakable smell of fire was everywhere. I initially thought that nearby Golden Gate Park must be burning and I promptly jumped on my phone to check the news for details. What I quickly learned was that this fire was actually burning many miles north in Sonoma County. It would eventually be known as the Tubbs Fire, the most destructive wildfire in California’s history at the time.

Many lessons were learned during the recovery that followed the Tubbs Fire and other wildfires since.  We learned that evacuation orders must be followed, freeways don’t always double as firebreaks, and clearing vegetation around your home can make a difference. We also learned the true value of a homeowners insurance policy.

It’s fairly easy to fall into the cycle of buying a homeowners insurance policy when you purchase your home and then paying the premium each year without giving much additional thought to the policy’s design. When a claim arises, however, the policy details make all the difference in how much protection is provided and whether the claim experience is a good one.

The details of a homeowners insurance policy are important. By understanding these details, policyholders can be better equipped to choose a policy that makes the most sense for them. Let’s start by asking the most basic question.

How Much Will the Insurance Pay?

The most important provision in a homeowners insurance policy is how the value of a loss will be determined by the insurance company. There are three valuation options to consider, each providing a different level of protection.

The first is ‘Actual Cash Value’ which is, the replacement cost minus depreciation.

The second is ‘Replacement Cost’, which is the cost to replace the property today with materials of similar quality.

The third is ‘Extended Replacement Cost’, which is the cost to replace the home even if the replacement cost exceeds the policy limit, usually up to 25% above the policy limit.

Actual cash value provides the least amount of insurance for the lowest premium. Despite the premium savings, we believe actual cash value policies should be avoided. The claims experience is likely to be less favorable, with the looming potential of a negotiation with the insurance company to determine the actual cash value at the time of loss. The last thing any of us wants to do is have a disagreement with our insurance company, especially if it could result in litigation down the road.

Replacement cost coverage is the most common valuation provision found in homeowners insurance policies. It is the amount it would cost to rebuild your destroyed or damaged home exactly as it was originally constructed. Depreciation is not a factor in the cost.

This all sounds great, but keep in mind that the insurance amount is also subject to the policy’s limit.  During the time you own your home, inflation must be accounted for, and replacement cost coverage puts the responsibility squarely on the policyholder to ensure that the limit keeps up with inflation.

For example, let’s say back in 1995 you purchased a 2,000 square foot home in San Francisco for $400,000. At the time you also purchased a homeowners insurance policy with a $400,000 limit and you have continued to renew the policy each year with no changes. It’s now likely that the home is significantly underinsured relative to how much it would cost to rebuild it today if a total loss were to happen.

Extended replacement cost provides the most insurance coverage and predictably comes at the highest premium. In exchange for higher premiums, policyholders not only get the most protection but also some peace of mind that the insurance amount will be sufficient to cover even the most severe damage.

It’s common for people to simply seek the lowest possible premium for homeowners insurance. This approach seems rational since the likelihood their house will be destroyed is statistically very low. With little risk of ever using the insurance, why pay more for greater protection? Additionally, some agents showcase low premium/low coverage options in order to win the business, with little regard for whether the policy adequately fits the client’s needs.

These issues came to light in a negative way after the recent wildfires. Many homeowners discovered only after the fire that their coverage was insufficient. While some carried an insurance limit of $200 per square foot., contractors were quoting rebuilding costs in a significantly higher range. In fact, a number of policyholders are suing the well-respected insurance company USAA for having “systemically underestimated” the replacement cost of homes and causing policyholders to be underinsured and unprotected. USAA is not alone as many homeowners felt they didn’t get what was expected from their insurance company when the time came to pay the claim.

Other Key Factors to Consider

A year after the fire, rebuilding efforts move forward at a snail’s pace and the claim experience has been long and frustrating for many. For those who have their insurance with direct-writer companies such as State Farm, Farmers, and USAA, filing a claim involves calling a toll-free number and dealing directly with the insurance company. What about that agent who originally sold the policy? He or she likely has little to no ability to help or impact how the claim is adjusted.

While the direct-writer companies aim to serve the insurance needs of the middle market masses, a higher end of the marketplace also exists, which can be accessed via independent brokers. Instead of representing one insurance company, the broker represents his or her client and stands completely independent of the insurance companies they place business with. They shop coverage around to competing companies such as AIG, Chubb, and Travelers and compare different offers to determine what’s best. They can also serve as a valuable advocate during a claim and can be a helpful and educated voice when dealing with insurance companies. The policies typically come with higher costs, but the higher quality of coverage along with the broker’s expert advice and service may be worth it.

Beyond the cost to repair and rebuild a house, homeowners insurance policies cover a number of additional types of financial losses and expenses, including the value of furniture and other personal property, potential liability issues, and expenses incurred while displaced from the home. These factors should also be considered carefully as part of any insurance assessment.

There are things that can be done right away to help ensure that your homeowners insurance policy is adequate. First, educate yourself on the true replacement cost value of your home and ensure that the insurance policy limit is appropriately aligned. You can determine value with online tools or by asking your insurance agent or broker, an appraiser, or contractor. Next, ask your insurance agent or broker whether extended replacement cost coverage is available and what the additional premium would be to add it.

If you feel you could benefit from a comprehensive review of your homeowners and other insurance policies, B|O|S can refer a number of independent insurance brokers who are well-equipped at determining the right coverage for you.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

34.  For Tech Professionals, Value Stocks Make a Lot of Sense

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One of the basic building blocks in portfolio management is buying a lot of different “stuff.” The financial industry uses a more refined noun — diversification — that rolls gently off the tongue but may seem equally vague. What does diversification actually mean? Is prudent application of diversification the same for every investor? Why or why not? Today’s episode discusses how value stocks can be a prudent addition to the portfolio of tech employees.

Show Notes:

‘Life is a box of correlations. What’s in your box?’, Aaron Waxman, April 1, 2015.

TRANSCRIPT:

Transcript:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode discusses how value stocks can be a prudent addition to the portfolio of technology professionals and was written by B|O|S Principal, Aaron Waxman.

One of the basic building blocks in portfolio management is buying a lot of different “stuff.” The financial industry uses a more refined noun — diversification — that rolls gently off the tongue but may seem equally vague. What does diversification actually mean? Is prudent application of diversification the same for every investor? Why or why not?

Within the context of an investment portfolio, successful diversification means combining broad baskets of assets that provide different patterns of return over different time periods. Doing so can help ensure that a portfolio participates in all markets — capturing returns provided by markets as a whole while reducing volatility (or turbulence) along the way.

But diversification matters outside of a portfolio, too. As discussed in the article included in the show notes , correlations surround our lives in complex ways, and we address those correlations — consciously or subconsciously — in a variety of ways. We buy insurance, hoping to lose our premium payments and never experience a catastrophe that destroys our house or takes our life. Oil-rich Norway is abandoning fossil fuel investments within its around $1 trillion sovereign wealth fund to hedge against the risk of declining oil revenue in a more carbon-efficient global economy.

For professionals with skills, talents, and expertise wed to the technology sector, a portfolio tilt to so-called value stocks can make a lot of sense. Value stocks are broadly defined as cheap stocks with lower-than-average growth prospects; whereas technology stocks typically have characteristics that categorize them as growth stocks with (to no surprise) above-average growth prospects. The correlation concept here is no different. If your wages and earning power are tethered to the technology sector and you hold equity awards tied to your tech company’s stock — all else being equal, as an investor, you start from a concentrated position in one area of the investable market. Thus, if you don’t compensate for this concentration by tilting an otherwise market neutral, index portfolio to non-tech areas of the market such as value stocks, suboptimal correlations may exist when viewed in the aggregate.

Additionally, apart from potential correlation benefits, value stocks as a group have historically provided meaningfully higher returns than growth stocks as a group. For instance, over the last 20 years ended June 30, 2020, the Russell 1000 Growth Index produced an annualized return of 5.45% as compared to the Russell 1000 Value Index return of 6.32% over the same time period. The reason for this outperformance is that investors tend to systematically underestimate the ability of weaker companies to enhance revenue growth and profits, and they tend to overpay for companies with growth stories by extrapolating recent success too far into the future.

Despite these observations, the technology space has unequivocally been the place to be over the last decade. Since the bottom of the financial crisis on March 9, 2009, technology stocks (represented by the S&P 500 Information Technology Sector Index) have provided unusually high returns — up an annualized 23.39% through June 30, 2020. And for those working in the technology sector over that period, equity-linked compensation packages may have been an added bonus.

While tempting to put the proverbial pedal to the metal — work in tech, invest in tech; the prudent play is to hedge your bets. History tends to repeat itself and very expensive stocks tend to revert to more historical averages. For tech professionals, a portfolio tilt to stocks that are likely to do (relatively) well — if and when the technology sector stumbles — seems to make a lot of sense.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This episode references the Russell 1000 Growth Index, which is a market capitalization-weighted index composed of constituents in the Russell 1000 Index with higher price to book ratios and higher forecasted growth rates. We also reference the Russell 1000 Value Index, which is a market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. Finally, we also reference the S&P 500 Information Technology Sector Index, which is a market capitalization-weighted index of companies in the S&P 500 Index that are classified in the Information Technology sector according to the Global Industry Classification Standard (GICS). An index is unmanaged and not available for direct investment.

33.  How to Safeguard Essential Documents and Precious Possessions

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The current coronavirus pandemic and recent California wildfires remind us of the uncertainty of life and the need to be prepared for unforeseen predicaments. Take advantage of extra time at home these days to take inventory of where your legal documents and other important records and certificates are being stored and whether changes in your storage and organizational systems are needed. Let’s walk through the best places to store original legal documents, health and medical information, official records, certificates, financial data, personal information, physical items, digital data, and passwords.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. On today’s episode we’ll review best practices for safely storing and protecting original legal documents, medical records, and precious possessions and was written by B|O|S Estate Planning Advisor, Judith Gordon.

The current coronavirus pandemic and recent California wildfires remind us of the uncertainty of life and the need to be prepared for unforeseen predicaments. Take advantage of extra time at home these days to take inventory of where your legal documents and other important records and certificates are being stored and whether changes in your storage and organizational systems are needed. Being prepared for whatever may arise includes organizing and safekeeping all important documents and precious possessions.

Our world has become increasingly digital—with the emergence of new technologies transforming the way we communicate, work, and live our lives. With abundant cloud storage, many important documents can now be stored virtually. In fact, it is easy enough to store the same information on multiple cloud servers that offer immediate access and backups of the data. However, certain valuables and prized memorabilia cannot be stored in that manner. For those items, choose a brick-and-mortar safe deposit box at a secured vault located outside your home or a fireproof safe fastened to the wall or floorboards in your home to keep those possessions safe.

Keep in mind, however, that a safe deposit box may not always be the wisest option. A vault at a bank or other institution may be closed when quick access is needed. The coronavirus pandemic has certainly taught us that there are no guarantees when it comes to what bank branches will be open and what their hours of operation will be. Following Murphy’s law, when you most need to get into your safe deposit box, it’s likely that will be the time when access is limited. Generally, consider storing important items that may be needed more frequently or on shorter notice in a fireproof home safe bolted to the floor or wall rather than in a safe deposit box located at a bank or credit union.

The volume of legal, financial, and personal information in one’s life can be overwhelming. But taking some time now to organize and store your information may help bring some peace of mind. Let’s walk through the best places to store original legal documents, health and medical information, official records, certificates, financial data, personal information, physical items, digital data, and passwords.

Wills, Trusts, Powers of Attorney, Advance Health Care Directives, and Letter of Instructions

If you’ve invested time in estate planning, you’re likely to have important legal documents such as wills, trusts, powers of attorney, advance healthcare directives, and letters of instructions. The originals of your will, revocable trust, and any irrevocable trusts can be stored in a secured safe or safety deposit box. Under the California probate code, any person with a key to the safe deposit box, a death certificate, and proof of identity can access the safe deposit box of a dead person to look for a will or trust. Otherwise, a probate—a legal process that establishes the validity of a will—will need to be initiated to obtain access to the safe deposit box.

It is a good idea to keep copies of these legal documents in an organized file or binder for quick reference. When estate planning documents are updated, be sure to destroy your previous original will. Revocable trusts are generally amended or restated in their entirety and it is wise to keep the originals of the older versions so you have a complete history of the document.

Generally, originals of powers of attorney and advance health care directives should be kept in a secured safe that is more readily accessible than a will or trust since you’re likely to need access to these documents more frequently—and possibly in emergency situations. Ease of access is crucial. Again, it is a good idea to keep several copies of these legal documents on hand since medical providers may request to review them and they typically only need to see a copy.

A letter of instructions is an informal document containing important financial and personal information for your survivors, successor trustee, or guardian and it should be updated as life circumstances change. It is beneficial to keep these instructions alongside copies of your will and trust in an organized private file or binder so you can review and update as necessary. To avoid confusion (for you and your survivors), you should destroy old instructions as you update them.

Birth, Marriage, Divorce, and Death Certificates

Birth, marriage, divorce, and death certificates are needed to prove entitlements to benefits or other matters. It is smart to have one or more certified copies of these documents on hand. Keeping these documents in a home safe helps guarantee the documents do not fall into the wrong hands. If the documents are misplaced or lost, additional certified copies can be ordered from the appropriate county recorder’s office either directly or through a fee-based service.

Original Social Security Cards

Original social security cards should also be kept at home in a safe to prevent the card from being misplaced or stolen. If the card is lost, access your online Social Security account to apply for a replacement card. Since you don’t need the original card very often, you could also store the card in a safe deposit box.

Passports

It is recommended that you store your passport in a locked cabinet. Since a passport can be needed on short notice, home storage is often more preferable than a safe deposit box. Uploading a digital copy to a password-protected cloud server that can be accessed from a cell phone can save time and aggravation when looking for specific information shown on the passport such as your passport number, date of issuance, or expiration date.

Property Deeds and Car Titles

Property deeds and car titles should also be stored in a safe place. Original deeds to property are rarely ever needed to complete a transaction but it is advisable to keep the originals. The ownership certificate for an automobile is needed to transfer title to a new owner so keeping the original in a safe or safety deposit box works best. If the title is lost, you can obtain a duplicate title certificate through the DMV.

Current Insurance Policies

Being adequately insured is part of modern life. Your life, your well-being, your home, and your stuff often requires protection. Much of this information can be kept in organized files where it can be accessed by yourself or others who might need the information. Since many policies are updated and renewed annually, this type of data can generally be stored in the cloud or kept in organized paper files where it can be easily accessed when needed. One exception to this rule is an original copy of a life insurance policy, which may need to be surrendered to the insurance company when submitting a claim. The original policy should be kept in a safe or safety deposit box.

Stock and Bond Certificates

Over time most companies have stopped issuing paper certificates for stocks and bonds. Clipping bond coupons is also a thing of the past. If you find yourself with any paper stock or bond certificates, it is generally recommended you give the certificates to a broker who will put the certificates in “street name”—essentially an electronic record showing ownership of a stock or bond. You will no longer have to worry about how to keep the certificates in a safe place. Plus, selling shares electronically involves a much simpler process.

Other Financial Documents

For most people, the days of receiving monthly account statements for bank and brokerage accounts are over. Most financial information is now provided as password-protected attachments to emails or accessed via secure online servers. Keep a list (that is, personal information guide or letter of instructions) of bank and investment accounts and contacts at financial institutions and wealth management firms so it is easy for someone to determine what accounts you maintain and with what institutions.

Doctors’ Prescriptions

Keeping an up-to-date record of medicines and prescriptions you are taking can be a lifesaving technique. If you are incapacitated in any way, a record can help you or a family member remember what medicines you are taking and help doctors and nurses evaluate compatibility of new prescriptions with current medications. A simple Microsoft Word document or an online PDF form can help you keep track of this information. Consider saving a copy in your organized paper files and in cloud storage that is accessible from your phone or computer. This information and/or the location of the information should be shared with a family member or friend.

Home Insurance Inventory

Homeowner’s insurance provides coverage for the contents of your home up to the limit selected with your insurance company. In the event of a covered loss, the insurance company may need a list of the personal property that was stolen or damaged, along with the estimated value of the items. The easiest way to keep a good inventory of your belongings is to take a video of each room in the house and then store the video in a fireproof safe or in the cloud. In situations of total loss, such as in the recent wildfires in California, many insurance companies paid policy limits in full without requiring homeowners to itemize losses. But it’s best practice to keep a good record of your personal property.

Cash

More and more the world is evolving into a cashless society. But for peace of mind, some individuals like to keep a significant amount of cash on hand. Typically, the best place to store physical money is in a fireproof safe attached to the wall or foundation so it cannot be easily removed from the home. Additionally, money should be stored in places not prone to fire or flood, or where it might be easily discovered by people coming and going from your home. While hiding money in places like a shirt pocket or behind a wall decoration may work, remembering where you hid the stash sometimes may be a problem.

Jewelry and Small Heirlooms

Jewelry items that are worn frequently are best kept in a home safe. That way you’ll always have access to them. If you store these items in a safe deposit box, you may find that the bank will not open for retrieval when the occasion for wear arises. Other small heirlooms or jewelry of value that will not be used or worn can be kept in a safe deposit box.

Spare Keys

In many instances, entry to locked places has become a keyless process. Many cars, houses, storage boxes, and safes can be opened with a keypad or a phone app. But for entry where a key is required, it is always best to keep one or more spares. Spares can be kept with a friend, in a box in your car, in your wallet, or in a safe or lock box. It is generally a good idea to label keys since many keys look alike.

Family Photos

Family photo albums filled with prints taken before the digital age when film was the only option are precious. Digitizing them with a scanner is time-consuming but is a good way to make sure these memories will be there in the future, even if the photo albums are lost or destroyed. There are numerous free online storage servers for photos or fee-based sites where your photos can be scanned, organized and saved. The key for ensuring these photos will be available for future generations is to make sure that your loved ones know where your photos are stored and how to access the photos if you are not available.

Passwords

Passwords can be maintained via an online password manager (for example, LastPass, Keeper, Dashlane), in an Excel spreadsheet, or in a Word document. If an online storage site is used, be sure to include the master password in your letter of instructions, which should be stored in a secure place. If an Excel spreadsheet or Word document is used, the document can be stored online with a password. Given the frequency with which passwords change and new ones are added, try to determine a logical system that avoids confusion and is easy to use.

Organizing, Locating, and Sharing Information

More than ever, it feels important to be connected to our families and trusted advisors and find ways for others to have access to critical information if and when the need arises.  Whether one uses (1) an online digital vault dedicated to organizing and storing legal documents and personal and financial information, (2) PDFs or hard copies of personal information guides, or (3) Excel spreadsheets or Word documents, it is important to find an organizational platform that works for you and one that can be easily updated. Knowing where to keep originals and copies of important documents and possessions is key to the process.

If you are interested in discussing the ways to best store and access your legal documents and possessions, please contact a member of your B|O|S wealth management team.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

32.  B|O|S Flash Briefing: August 17, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, August 19th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks, as measured by the S&P 500 Index, were slightly positive for the week ending August 14th and are now trading very close to all-time highs. The Index has registered gains in six of the last seven weeks and has risen an incredible 51% since the bear market low on March 23rd.  Stocks received a bit of a boost last week when inflation data came in that was much stronger than expected. The annualized rate of core inflation, which excludes the volatile food and energy sectors, rose to 1.6% for the month of July and was significantly higher than the 1.1% that was expected. The higher-than expected inflation rate eased fears of the potential economic impacts of the resurgence of COVID-19 in the U.S. The inflation measure was boosted in part by price increases in many of the hardest hit industries during the pandemic such as airfares, lodging and autos. The prices in these industries remain well below the pre-pandemic level despite the recent increases. The better-than-expected inflation report also led to a rise in bond yields. The yield on the U.S. 10-Year Treasury bond rose above 0.7% for the first time in two months. Bond prices fall when yields rise which led to a weekly decline in the Bloomberg Barclays U.S. Aggregate Bond Index for the first time in ten weeks.

Tesla recently announced a 5 for 1 stock split following closely on the heels of an announcement by Apple Inc. of a 4 for 1 stock split. Stock splits have become less popular over the years. There have only been two stock splits in the S&P 500 Index in 2020 so far and there were only five in the index for all of 2019. This is in sharp contrast to earlier periods. In the 1990’s the S&P 500 Index averaged 56 splits per year and in the 2000’s the index averaged 33. The decline in stock split activity seems to be related to the growth of mutual funds and ETFs. One of the main reasons companies would issue splits years ago was to allow for smaller investors to participate in stock ownership. The advent of mutual funds and ETFs reduced that need. Also, some companies have begun to believe that a higher stock price portrays some level of success or prestige.  The announcements by Tesla and Apple were well received by investors with each of their stocks rallying sharply after their announcements. That has some investors wondering whether this may start a wave of new stock splits. There are currently six companies in the S&P 500 Index with stock prices over $1000, including Amazon and Alphabet, and another seven companies with stock prices between $500 and $1000. It is important to note that a stock split adds nothing to the value of the company as it just splits the existing value into smaller portions.

Over the last 20 years, long-term U.S. Treasury bonds have performed better than the S&P 500 Index. As of August 14, 2020, the Bloomberg Barclays U.S. 20+ Year Treasury Index has earned an annualized return of 7.8% over the last 20 years while the S&P 500 has earned 6.2%. So why should an investor even hold stocks? First, the bond returns experienced over the next 20 years are unlikely to meet or exceed the returns for the last 20 years given today’s historically low interest rates. Yields on 20-year treasuries are currently about 1.2% and were about 5.5% 20 years ago. Second, bond outperformance is highly dependent on the time period examined and the last 20 years includes two of the worst bear markets for stocks in history. No one knows what is going to happen over the next 20 years, but we believe that stocks remain a key component of a diversified portfolio.

Flash Briefings will be taking next week off due to vacation, but will return the week of August 31st.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the Bloomberg Barclays U.S. Aggregate Bond Index, which is a broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. Lastly, the episode references the Bloomberg Barclays U.S. 20+ Year Treasury Index, which is an index which measures the performance of U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with 20 years to maturity or more. An index is unmanaged and not available for direct investment.

31.  Switching Jobs, Switching Your Retirement Savings Strategy

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The economic impact of COVID-19 has created high unemployment and volatility in the employment market with many leaving previous jobs and starting anew at a different employer. A new job presents the chance to accelerate your retirement savings strategy and the following describes three ways to consider.

Show Notes:

The following are important footnotes from this episode:

1 Bureau of Labor Statistics, “Economic News Release: Employee Tenure Summary,” September 20, 2018, https://www.bls.gov/news.release/tenure.nr0.htm

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode provides suggestions and strategies to maximize your retirement savings when switching jobs and was written by B|O|S Director of Financial Planning Michelle Soto.

The economic impact of COVID-19 has created high unemployment and volatility in the employment market with many leaving previous jobs and starting anew at a different employer. A new job presents the chance to accelerate your retirement savings strategy and the following describes three ways to consider.

Roll Over Your 401(k)

As of January 2018, the median number of years that employees remain at an employer is 4.2 years, according to the Bureau of Labor Statistics. Gone are the days when you stay with the same company for your entire career. Thus, it is likely you will have multiple 401(k) accounts. If you haven’t already done so, we recommend that you consolidate your previous 401(k) accounts into your current employer’s 401(k) if the plan allows.

Many new clients come to B|O|S with multiple 401(k) accounts. Since the accounts are scattered about, it’s difficult to track each account’s investment details or have visibility into performance. Do you know how these old plans are invested? Do you understand your total asset allocation? How well has your 401(k) performed relative to key benchmark indices? How much do you have in retirement assets? These questions are much easier to answer when you are only evaluating one 401(k) account.

401(k) Rollups: Paving the Way for Annual Roth IRA Contributions

If you are a high earner, rolling up any pretax funded IRA assets into a new 401(k), if the plan allows, helps pave the way for you to make annual “backdoor” Roth IRA contributions. This is a lesser-known, technical approach that is available when you switch jobs.

Let’s first establish the core concepts of saving beyond a 401(k) and the benefits of the Roth IRA. A fundamental rationale for saving for retirement is to provide you the freedom from having to work your entire life. Having more money in retirement assets may give you the option to retire early or have more financial freedom in your later years. A 401(k) plan is a powerful retirement savings tool, but it has limits, specifically a maximum 2020 pretax employee contribution amount of $19,500 plus an additional $6,500 for those age 50 and older. However, your compensation level may allow you to save beyond these maximums through a Roth IRA, another type of retirement account that can be funded up to a $6,000 per year maximum in 2020 plus $1,000 for those age 50 or older.

Roth IRA assets are attractive for two key reasons. First, Roth IRA accounts provide the benefit of tax-free, not tax-deferred, growth because they are initially funded with after-tax dollars. Second, having Roth assets will provide you with less tax liability when managing your taxes later in retirement. This is in contrast to pretax funded retirement accounts such as a traditional 401(k) or IRA for which each withdrawn dollar is taxed at ordinary income rates.

If you are convinced it’s worth contributing to a Roth IRA, there are two contribution prerequisites:

  • your income must be below specific limits, which in 2020 are $124,000 for single filers or $196,000 for married people filing jointly, for a direct Roth IRA contribution

or

  • if you earn more than the limits, you must first make a nondeductible traditional IRA contribution and then immediately distribute the contribution to your Roth IRA. This is the backdoor Roth IRA contribution mentioned earlier and it’s a two-step process. First, make a deposit of up to $6,000 into an IRA. This contribution will not be deductible against taxable income and you should inform your CPA of the deposit. Second, request that the account custodian transfer the funds from the IRA account to the Roth IRA.

Backdoor Roth IRA contributions are more tax-efficient if you do not have any pretax IRA assets as you will avoid the IRA Aggregation Rule and pro-rata basis calculation. When an IRA has received nondeductible contributions, the distribution of those dollars is received tax-free as a return of after-tax contributions. However, the IRA Aggregation Rule throws a curveball in this process. This rule stipulates that when determining the tax consequences of an IRA distribution, such as the distribution from a nondeductible IRA to a Roth IRA for a backdoor Roth IRA contribution, the year-end value of all IRA accounts will be aggregated together for tax calculations. Then, a calculation must be made to determine how much of the distribution will be a return of principal on a pro-rata basis. The bottom line is that if you have several IRA accounts funded with both pretax and after-tax contributions, then a portion of your annual backdoor IRA contribution will be taxable, which reduces some of the benefit of the technique.

For example, Julia has two IRA accounts that total $50,000. The first IRA was funded with $44,000 of pretax dollars. The second IRA was just funded with an annual $6,000 nondeductible IRA contribution. If Julia wants to transfer her $6,000 IRA contribution to her Roth IRA, she can’t just take out the $6,000 of after-tax contributions on a tax-free basis due to the pro-rata rule. To calculate the tax consequences, Julia must divide the nondeductible IRA contribution of $6,000 by the total amount in the IRA accounts of $50,000 to arrive at a 12% after-tax rate. Thus her $6,000 withdrawal will have $720 of after-tax funds while the other $5,280 will be considered taxable income.

If you do not have IRA assets funded with pretax assets, you can avoid the pro-rata calculation as explained above. Thus, after changing jobs, inquire whether your new employer’s 401(k) plan will accept rollovers of your previous 401(k) accounts and rollups of pretax IRA assets. If so, you can place all your pretax funded retirement assets into a single 401(k). You will then have an empty IRA account open simply as a transfer point for making annual backdoor Roth IRA contributions.

Does Your New 401(k) Plan Accept After-Tax Contributions?

Some employers’ 401(k) plans allow for after-tax contributions, which may be appropriate for high earners who are able to save beyond the 2020 $19,500 employee deferral limit. The benefit of making after-tax contributions in a 401(k) is that the earnings are tax-deferred until withdrawal later in retirement. The after-tax contributions are not taxable. The total 401(k) contribution limit for 2020 is $57,000 including the employee deferral, employer contributions, and after-tax employee contributions. For example, if an employee who is not yet 50 years old maxes out their 401(k) in 2020 and their employer contributes $7,000, their after-tax contribution limit will be $30,500.

Putting It All Together

A new job gives you an opportunity to rethink your approach to retirement savings. Find out if your new plan allows 401(k) rollovers, IRA rollups, and 401(k) after-tax contributions. If your plan allows, in 2020 you will be able to invest the following amounts toward retirement:

  • $19,500 into a 401(k) plus $6,500 at age 50 and above.
  • Up to $37,500 into a 401(k) via after-tax contributions.
  • $6,000 through a backdoor Roth IRA plus $1,000 at age 50 and above.

This significant savings strategy may help put you in the position to build more wealth over the long run or for an early retirement.

Please see the show notes for important footnotes from the original article, “Switching Jobs, Switching Your Retirement Savings Strategy”.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts

30.  B|O|S Flash Briefing: August 10, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, August 12th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks have continued to rise and are now very close to reaching an all-time high. As of the close of August 10th, the S&P 500 Index has had a positive return for 16 of the last 20 trading days and has risen 6.6% over that period. Second quarter earnings reports have continued to be better-than-expected and economic data, though still historically bad, continues to slowly improve. The second quarter earnings season is near completion for the companies in the S&P 500 as approximately 90% of the index has reported. Earnings for the index are on pace to decline by 34% relative to the second quarter of 2019. That is obviously a significant decline in earnings but is actually much better than the 45% decline that was expected before the season started. In general, analyst estimates have historically been lower than the actual results but the earnings surprise for the second quarter is shaping up to be one of the largest on record according to Factset.

The U.S. jobs data released during the week ending August 7th was bleak but was also better than economists had been expecting. Initial claims for jobless benefits rose by 1.2 million while the unemployment rate fell to 10.2% in July. While the better-than-expected numbers were welcome, they could also complicate negotiations for additional fiscal stimulus in Washington as a larger relief package is unlikely if the economy is improving. Republicans and Democrats have continued their negotiations but progress has been slow. Over the weekend, President Trump issued Executive Orders that would extend a portion of the COVID-related unemployment benefits and provide relief from evictions and student loans; however, the legal authority to issue these specific orders is in question and may lead to further uncertainty regarding the size and scale of additional fiscal stimulus.

U.S. stocks have continued to outperform foreign stocks for the year. One reason foreign stocks have lagged this year is the poor performance of the United Kingdom stock market. The U.K. is the second largest country by market capitalization outside the U.S. and is down about 20% year-to-date. The economic impacts of COVID-19 have been worse in the U.K. than other developed countries. U.K. officials recently estimated that the U.K. economy contracted by 20% between April and June. In contrast the U.S. economy shrank by 9.5% and the Eurozone shrank by 12% over the same period.

The rally in gold has been well-documented in Flash Briefings over the last few weeks, but recently silver has begun an incredible move of its own. The spot price of silver has climbed almost 20% since July 31st while gold has climbed only about 3% during the same period. Silver has climbed for many of the same reasons as gold and the recent outperformance of silver is partially due to the fact that gold is trading at all-time highs while silver is still well below its all-time high. That said, the two precious metals are not equivalent. Silver has a long history of being more volatile than its pricier cousin. Some of the additional volatility is due to the fact that the silver market is only about one-fifth the size of the gold market which means large trades in silver can have a larger impact on the price relative to gold. The price of silver is also more correlated to the business cycle than gold since silver has many more industrial uses.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

29.  B|O|S Flash Briefing: August 3, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, August 5th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks have continued to trend higher on leadership (once again) from technology stocks. The tech-heavy NASDAQ 100 Index had been underperforming relative to the S&P 500 Index over the last few weeks, but that trend reversed sharply as last week wore on. Last Wednesday, the CEOs of Apple, Amazon, Google, and Facebook appeared before Congress with questioning focused on concerns that these companies  may wield monopoly power as they increasingly dominate their respective markets. Increased regulation of these companies is one of the primary risks for investors in these stocks, but they were apparently not concerned by the result as the stocks of each of these companies were up by 1% or more on the day of the hearings. Coincidentally, all four of these firms announced their second quarter earnings the following day after the market closed and the results were generally better than analysts were expecting. Apple, the largest company in the world by market capitalization, rose 10% the day after announcing earnings. The company announced sales growth in all its product lines despite many of its stores being closed for most of the quarter. They also announced a 4 to 1 stock split. Apple’s market capitalization is now approximately the same size as the entire stock market of the United Kingdom. Facebook rose 8% last Friday after their results showed global users rose 14% year-over-year to 3.1 billion and Amazon stock also rose after announcing its sales grew by 40% year-over-year during the second quarter. These technology-oriented stocks contributed to the NASDAQ 100 Index outperforming the S&P 500 by over 2% for the week ending July 31st. The NASDAQ 100 is now up over 27% year to date through August 3rd while the S&P 500 is up approximately 3% over the same period.

The first estimate of U.S. second quarter GDP was released last week and it was just as bad as many were expecting. The report showed an annualized contraction of 32.9% which was the worst reading on record. To be clear, this does not mean that the economy contracted by one-third in the second quarter. It is convention for the number to be quoted as an annualized number which means the economy would only contract by one-third if the second quarter pace was sustained for four consecutive quarters. The quarter-over-quarter contraction was about 9% which is still historically bad. Economists expect a sharp rebound in the third quarter but forecasts vary widely, complicated by a resurgence of COVID-19 in the U.S. The U.S. jobs report for July will be announced later this week. Current expectations are for the economy to add about 1.5 million jobs and for the unemployment rate to drop to 10.5% from the 11.1% announced in June. The results may have some impact on the ongoing negotiations in Congress regarding a new stimulus package. Employment data that comes in stronger-than-expected may support Republican desires for a smaller stimulus package while the opposite result would support the Democrats’ desires for broader support.

Gold has continued to rally, rising above $2,000 per ounce for the first time in history. Gold has continued to rise for many of the same reasons that have been pointed out in previous Flash Briefings (low yields, inflation concerns) but saw an additional tailwind when the real return on 10 Year U.S. Treasuries dropped below -1% last week. This is the first time that has happened since the U.S. began issuing inflation protected bonds in 1997.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the NASDAQ 100 Index, which is a modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. It also referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

28.  Do Deficits Matter?

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In this episode I am joined by fellow B|O|S Principal Dave Campbell to tackle four questions about deficits. First, what are deficits? Second, what’s B|O|S’ opinion, do deficits even matter? Third, why do deficits matter to investors? Fourth and finally, what are we doing about it at B|O|S?

Show Notes:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. The individual stocks referenced are not currently being recommended and have not been recommended in the past by B|O|S.  For more details, please see bosinvest.com/disclosures.

The following links are included in the transcript below and provide context to aspects of the episode’s conversation.

“Federal Reserve should embrace more pain for good of the economy”, San Francisco Chronicle Op-Ed, Dave Campbell, Dec. 16, 2017.

“Trust”, Dave Campbell, May 22, 2018.

“Do Deficits Matter?”, Dave Campbell, November 11, 2019.

“The Federal Budget in 2019: An Infographic”, Congressional Budget Office, April 15, 2020.

“Federal Debt: A Primer”, Congressional Budget Office, March 12, 2020.

“America’s Fiscal Future: Federal Debt”, U.S. Government Accountability Office.

“The 2020 OASDI Trustees Report”, Social Security Administration, April 22, 2020.

“2019 Medicare Trustees Report”, April 22, 2019.

“State and Local Government Pension Funding Status, 2002 – 2017”, Board of Governors of the Federal Reserve System, December 20, 2019.

Everett Dirksen, “A billion dollars here…”, Forbes.

“Historical Debt Outstanding – Annual 2000 – 2019”, Treasury Direct.

“Velocity of M2 Money Stock”, Federal Reserve Bank of St Louis Economic Research.

“About the Fed”, Board of Governors of the Federal Reserve System.

“United States Fed Funds Rate 1971-2020 Data | 2021-2022 Forecast”, Trading Economics.

“Powell Has Become the Fed’s Dr. Feelgood”, James Grant, Wall Street Journal, June 28, 2020.

“A Decade of Debt”, Carmen M. Reinhart & Kenneth S. Rogoff, National Bureau Of Economic Research, February 2011.

“Japan General Government Gross Debt to GDP 1980-2019 Data | 2020-2022 Forecast”, Trading Economics.

Tax Cuts and Jobs Act bill summary, U.S Congress.

“There Are No Libertarians in an Epidemic”, Peter Nicholas, The Atlantic, March 10, 2020.

“Labor Force Statistics from the Current Population Survey”, U.S. Bureau of Labor Statistics.

TRANSCRIPT:

David Newson: The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. The individual stocks referenced are not currently being recommended and have not been recommended in the past by B|O|S.  For more details, please see bosinvest.com/disclosures. Hello, and welcome to B|O|S Perspectives podcast, I’m David Newson. On today’s show I’m in conversation with one of my partners, Dave Campbell. He provides investment portfolio design and financial planning advice for private and institutional clients at B|O|S.

David Newson: Dave, previously led the Financial Planning Committee and he continues to help in researching the latest changes in a variety of financial and estate planning areas that affect our clients, providing education to staff and outside professionals, building and acquiring analysis tools to address specific client questions and acting as an expert consultant for clients and the media. Today, Dave and I are answering four questions you might have about deficits. First, what are deficits? Second, what’s our opinion, do deficits even matter? Third, why do deficits matter to investors? Fourth and finally, what are we doing about it at B|O|S? Hi, Dave, and welcome to the show.

Dave Campbell: Hi, Dave. Good to talk with you.

David Newson: Dave, you authored three articles in the recent past that directly relate to our show today. The first appeared as an op ed in the December 18th, 2017, issue of the San Francisco Chronicle and was titled Federal Reserve Should Embrace Pain to Ward Off Future Financial Collapses. The second follows the first and was published in May, 2018, titled Trust, where you call out the fragility and the importance of trust in our societal institutions, such as Congress and the U.S. Central Bank or the Fed. The third published in November, 2019 shares the title of this episode, Do Deficits Matter? I’ve included a link in the show notes to each of these articles in case our community of listeners would like to read them. Let’s get started. What is a deficit? And in this context, I’m referring to the deficit of the United States federal government.

Dave Campbell: Well, simply put we run a deficit when spending exceeds revenues for the government. For example, in fiscal 2019, our federal government spent about $4.4 trillion. However, the revenue, all the taxes and the fees that the government collected totaled about $3.4 trillion, so in that fiscal year we actually ran a deficit of about $1 trillion. And so much like a family budget if your spending wants to exceed the income you have and there’s no savings to make up the difference, and our government doesn’t have savings, then it has to be made up. Well, no, it has to be made up somewhere in some other way. That’s what a deficit really is about.

David Newson: Okay, and how do we fund deficits?

Dave Campbell: Well much like households who are spending more than they have, we need to borrow that money. And so the U.S. government rarely cuts spending. When it wants to spend above what it’s taking in it has to borrow just the same as a family. And how that happens is, it does so by going into what’s called the open market, and it’s really helpful to think of this sort of operation of how the government actually on a practical basis, David, goes out and borrows money. Think about it much like you would think of the executive branch in our federal government, much like a corporation structure.

Dave Campbell: The president really is the CEO, he’s in charge. And the treasury secretary is the CFO, the chief financial officer for the government. Advises the president on financial matters in the government and also is responsible for implementing a fiscal policy. In this case, the treasury would then look to float if you will, or to sell treasury bonds of different kinds to the public. And that way selling the bonds, which is really creating a loan, sells a bond and collects cash for that. In this case, fiscal year 2019, for example, it might turn to the market in that year and sell $1 trillion of different types of bonds to raise the cash to fund the deficit.

David Newson: I’ve been reading a lot about the United States government running big deficits and this has been going on, I think for some while, it’s certainly been in the press during this pandemic, COVID-19. Can you tell me a little bit about how big the problem is?

Dave Campbell: Well, the last time that we had a surplus or even a balanced budget was really in the mid-’90s during the Clinton administration. When we think about fiscal year 2019, for example, sort of sticking with that, that was not the first year that we had run a deficit. We’ve been running them for a while. And if you looked at what the official total amount of outstanding debt at the federal level is, you will get a total of roughly $21 to $22 trillion at that point. It was running roughly around 100% of our gross domestic product, our GDP. That’s a fairly big number, but it actually hides a little bit of the real true liabilities that are sitting in the U.S. and at some point we’re going to have to pay.

Dave Campbell: For example, when I look at that number, I think in the back of my mind, well, there’s also some unfunded liabilities that are not in that official number. For example, we have Medicare and Social Security and all those promised benefits that are to be paid. This is included in a report annually by the trustees of the Social Security and Medicare trust funds. And the last report that came out last year said that the unfunded portion of those liabilities over the next so many years totals roughly $22 billion, I’m sorry, $22 trillion in and of itself. That’s really double the outstanding debt that we have of the federal government.

Dave Campbell: And then on top of that, the St. Louis fed starts to take these unfunded liabilities, not from the federal level but estimates what that looks like for state and local government unfunded liabilities. And the most recent estimate that I saw, David, was about a $5 trillion number. When you add it all up you’re really talking roughly $50 trillion more or less of debt or unfunded liabilities that we’re going to have to pay at some point down the road.

David Newson: And it’s a-

Dave Campbell: And it’s a big, big number.

David Newson: Yeah. This sounds like a very, to use your example, this sounds like a very interesting family. We started out with we are spending more than we earn and we are running gigantic deficits, $1 trillion in 2019 alone. And then we just learned how we fund these deficits is debt because, well, this family does not save any money and so we go out into the markets and we borrow money, huge sums of money. And while sometimes it may be easy to look at the debt number being around $22 trillion, it’s really more than twice that. This is a really complicated budget, this is a massive family budget that we have.

Dave Campbell: Well, David, it’s like that. And I think that quote that was always associated with Senator Everett Dirksen from Illinois, “A billion dollars here, a billion dollars there and pretty soon you’re talking about real money.” And that’s how we got here.

David Newson: You’re right, oh gosh. What’s our opinion on this? And I think I can lead here and say deficits do indeed matter. And the big question, why? Well, it’s because you pay for them. I’ll let you take it from there.

Dave Campbell: That’s exactly right. Deficits actually matter in a variety of ways. For example, we have as anyone can tell you, when you take on debt sooner or later in one way or another you eventually have to pay that debt back, individuals who lend to you will eventually want their money back at some point, so you really have to think about that. It’s not a forever loan typically and you can walk away and they’re going to want the money back at some point. We have to think about that and we have to think about higher level issues, much like the total level of debt versus the total level of revenues or value that’s being created in your economy, can you support that level of debt?

Dave Campbell: Much like a family when we were using that analogy, if your income level is say $100,000 for a family, it might be palatable to borrow $10,000, but as the number gets bigger and bigger and bigger it becomes harder and harder to not only service pay the interest on that debt, but to pay the actual principal amount back. That’s the same thing at the federal level, at some point we have to watch how big the total deficit gets because it will become harder and harder and harder to service that debt over time.

Dave Campbell: We see some of these deficits they matter in a couple of other important ways. We were running deficits coming out of the financial crisis in 2008 simply because we were trying to stimulate the economy and get it to grow. But it was interesting to note that although we had some successes with that, both with fed policy and with congressional spending, deficit spending, we didn’t really see the big boost to the economy that I think we had seen historically.

David Newson: Why not?

Dave Campbell: Well, that’s an interesting question and there’s the debate about that. But one aspect of this which I found quite fascinating is that although we were shoving a lot of money into the economy both through spending but also through the liquidity that the Federal Reserve was providing, that money was not moving around quite as much as it used to in the past. For example, when we look at economically measures of this we talk about what’s called the velocity of money. And what we found was the velocity of money dropped dramatically.

David Newson: Dave, what does that really mean?

Dave Campbell: Well, imagine a dollar bill that you have in your hand and it has a tracking device on it, David, and you want to know how many times, right? The velocity would really tell you how many times does that dollar bill change hands over the course of some period of time in the economy. The higher the number, the more spending, the more economic activity there is, the more robust the economy, likely a growing economy. If that number is really low or declining it means that economic activity is actually slowing down. And what we saw was that velocity number was not only low but it was actually declining and actually has been declining ever since. Although there’s a lot of money in the financial system, it’s just not going anywhere, it’s not getting into the hands, so think back in the financial crisis days where banks were suddenly given a lot, a lot of cash. The problem was they had too much cash. They just didn’t have enough qualified borrowers. So the velocity of money, all this money that was in the system, wasn’t really moving around. That cash was oftentimes just sitting there.

Dave Campbell: So we had some issues that were starting to play out as a result of deficits, but also as a result of some other things. So for example, when we look at the Fed itself and the policies that it has created, we have to remember that the Fed is relatively young institution.

David Newson: Right. Right. I think the Fed was created in 1913.

Dave Campbell: And it’s had some growing pains. So for example, in the Great Depression, one of the classic mistakes that Ben Bernanke always talked about when he was Fed chairman, was that the Federal Bank back then pulled money out of the system. It was actually taking money and reducing the money supply at certain point. And that’s been blamed for exacerbating the Great Depression. And so he avoided that. He made sure there was plenty of liquidity in the system to prevent the financial system, first of all, from collapsing or freezing up, but also to make sure that there was plenty of capital available for anybody who was willing to borrow and spend. And they were trying to encourage that by dropping interest rates to the floor, essentially. To make it very cheap, make money very, very, cheap.

David Newson: So what can happen when money becomes so cheap?

Dave Campbell: You can have some other unintended consequences. When we go back and we look at the Fed, and I really take this back to basically Long Term Capital Management imploding in the late 90s. This is a timeframe when the Fed stepped in, rather than letting that entity, that investment entity collapse, the Fed stepped in, because it was worried that there was so many interrelated agreements between that entity and different banks around that they weren’t sure it was … it wasn’t too big to fail. But really I think the way they described it was too big to unwind haphazardly. So the Fed was worried about the effects that would have on the financial system in general, stepped in and unwound it.

Dave Campbell: But really, what I think investors looked at that episode and came away with was an eye opening event that when things really looked bad, the Fed stepped in and saved the day like the lone ranger coming to the rescue, right?

David Newson: Sure.

Dave Campbell: So they looked at that event, and then that message, I think, became reinforced with sort of the onset of other events that followed. So for example, the dotcom bubble was bursting, the stock markets taking a big hit, the Fed steps in again, in a big way, drops interest rates from, I think they had had them up to 5% on the interest rate that it controls. They dropped them to about 1%, which was historically low by that point in time. And trying to stimulate the economy, one of the unintended consequences of that was a big bubble in real estate prices, right?

David Newson: Hmm.

Dave Campbell: So when we got to 2006 or ’07, we had people buying real estate. You probably shouldn’t have been buying real estate. And they were getting loans that they probably shouldn’t have gotten because they didn’t even have to, in many cases, prove any income or assets.

David Newson: Easy money.

Dave Campbell: … and we have this big bubble. Easy money. Well, the price of money was really, really cheap that was designed by the by the Fed. But it created this bubble and the bubble bursts.

David Newson: And then what happens?

Dave Campbell: Well, the Fed steps in again, now we get, the financial crisis and the whole quantitative easing, operation twist flooding again, capital into the system, but bringing interest rates, not down to one, but basically down to zero. Now money is even cheaper trying to reflate those assets. And that policy stays in effect for almost a decade. The idea was to stimulate the economy and get it growing again, but we never really removed it fully.

Dave Campbell: I think the Fed took some tentative steps to kind of get it out, raise interest rates a little bit, unwind that big balance sheet that it had created. But then it reversed course by the end of 2018, markets were throwing a little bit of a tantrum thinking the Fed would go too far and concerns about global growth. And the Fed just completely reverses course starts to bring interest rates back down.

Dave Campbell: And, as we’ve seen, begins to bring that balance sheet back up, and this is all happening before the COVID-19 pandemic is hitting. So now when we get some event like that, we go into not only full panic mode again, essentially by the Fed, but it goes above and beyond. So every time the Fed acts, it has to do even more than it did the last time, because the effects of its actions are becoming weaker and weaker. So it has to go bigger and bigger and bigger just to have any kind of an effect.

David Newson: Sure. You pointed this out in your op-ed for the San Francisco Chronicle where you point out like, oh, okay, you start getting addicted. Market start getting addicted to what the Fed is doling out, right?

Dave Campbell: Addiction is a good word. Yes. I think that’s exactly a great way to describe it.

David Newson: So you want the desired effect and you’d get X dose. And then in order to have that desired effect, again, you need a higher dose and the next time yet a higher dose. And you just sent me an article the other day, from the opinion section of the Wall Street Journal, Powell has become the Fed’s Dr. Feelgood.

Dave Campbell: Yes, exactly. And we’ve written about this in the past too. There’s really kind of a junkie type of mentality here that’s going on. And then to get that high, you have to have a bigger and bigger hit to get to the same level. So I think in some sense we’ve seen successes by the Fed. It really did avoid a financial system collapse in 2008, for example. I think that was the right thing to do when they stepped in dramatically. But there, I think also is a little bit of a sense of hubris now on the part of the Fed that that’s its role. It is to be the savior and it’s always to step in, even proactively, to prevent pain if you will, which is the word I tended to use back when, to help out. But it’s with the blindness a little bit to these unintended consequences, and the fact that it is having to do more and more and more each time, which is enabling the junkie.

David Newson: Sure. So what’s the real risk?

Dave Campbell: Well, I think the risk here is that when so much of this Fed interference into how markets are supposed to work, you can have some big negative effects. So for example, interest rates are usually in not only a method of regulating money, borrowing and lending in the economy, but also that can be a tremendously helpful signal. So with all the borrowing, for example, that we’re having at the Federal level, how do we know when we’ve borrowed too much or when it’s getting to be too big, and that we should begin to be concerned about the overall level of debt that we’re taking on.

Dave Campbell: Normally you would look at interest rates and then when lenders become concerned about that, they begin to demand a higher and higher level of interest to lend you money because they’re worried about being paid back. But we can’t use that as a signal right now because the Fed hasn’t basically engineered artificially low interest rates to stimulate the economy.

Dave Campbell: So that signal that we would normally be looking at to help us avoid problems doesn’t work right now because we’ve kind of turned it off if you will.

David Newson: Sure.

Dave Campbell: We also have, as we’ve talked about and have already seen with the dotcom bubble with the housing price bubble, you have some potential to have inflated assets because money is so cheap. It’s easy to borrow and take that money and invest it. And you begin to see both inflated asset levels of all different types. That includes housing, securities prices, but you also can get into complete misallocation of capital in your economy. So rather than money being priced appropriately and being therefore prudently allocated to the most efficient use in your economy, you get money that might be spent frivolously in a lot of different areas. Not all of it helpful in terms of making the economy more productive.

Dave Campbell: And we have to guard against that. We’ve seen those excesses already a little bit.

Dave Campbell: The other thing here is really sort of related back to those articles that you were talking about earlier, David, which is they’re all interrelated, but one of them was trust. Here we have the Fed, which when we think about these … our government institutions, we look at the presidency, Congress approval ratings are historically low. There’s a very, very low level of trust in them based on their actions on the last couple of decades.

Dave Campbell: We see that in a variety of places, even today, sitting in the middle of this pandemic and the Black Lives Matter Movement about policing in general have suffered the same thing. So we have a lot of our social and governmental institutions that have had declining levels of trust, which makes your society fragile.

Dave Campbell: One of the few institutions which has held or maintained a relatively decent level of trust is the Fed. But if we get into this cycle of enabling, as we’ve talked about it, in those terms or a willingness and a hubris to jump in and interfere continually with the normal operations of markets, you really do risk that it blows up in your face, that the Fed is then blamed for creating the problem rather than being part of the solution. And that would completely dissipate all the trust that you have in the Fed. And it can really, really lead to some very serious consequences. And we know that things can turn south pretty quickly because we’ve seen it even in recent time periods.

Dave Campbell: So for example, Venezuela has been one of those countries where it took a very robust economy and through very, very high levels of spending and then printing money, which has also been talked about recently. It gets into a case where inflation begins to jump and it erodes faith and trust both in the country and in the currency. And it’s a death spiral. And we want to avoid that.

David Newson: Right. Dave, I want to shift and talk a little bit about why deficits matter specifically to investors.

Dave Campbell: Well, obviously adding on a trillion dollars of debt, which was already what the projection was for the next decade before we hit this pandemic, is really not a sustainable type of a situation. But we can’t continue to add on large, large amounts of debt onto our economy and expect to support that. Unless you see tremendous growth in the economy, the debt can actually have a devastating effect on the economy.

Dave Campbell: So for example, a couple of researchers by the name of Carmen Reinhart and Kenneth Rogoff had a famous study that came out, I think about 10 years ago, that looked at different countries over time in history and looked at how the effect of debt played on their growth rates. And one of the little nuggets that came out of that was that for countries whose debt began to exceed 90% of their GDP, that began to retard growth. So we’ve already talked about a debt level, if you measured it fairly, that nominally, it looks like we’re already close to 100% of GDP and if you really add on all these unfunded liabilities that are still hanging out there-

David Newson: Like twice.

Dave Campbell: It’s twice that. So what country would look like that? Well, Japan looks like that today. Its’ debt to GDP is well over 200% already, and it has for about four decades now been dealing with a very anemic economy. It hasn’t really had inflation, but it’s really fighting deflation, which is exacerbating all of that. Because if you think prices are going to be cheaper tomorrow, why should I spend it today? I’ll just wait. Right?

David Newson: Sure. Yeah.

Dave Campbell: So you can make a strong argument that, that is exactly one of the structural problems that is holding down Japan in terms of enabling it to get growing again. Now, they’ve got other issues as well. They’ve got a big demographic issue, but certainly debt has to be part of that equation and I think that comes to the fore when you look at the details of a country like that. So debts really do matter and investors should really consider them. I mean, I think in today’s world, it’s almost as if investors sort of have the “What, me worry?” attitude.

David Newson: Sure.

Dave Campbell: I think their feeling is based on what we just talked about, if the economy goes down, if the market goes down, the Fed’s just going to come in and save the day. Right? And so it’s a little bit of a blindness to some of these risks that are really out there and that really can happen, even if we haven’t seen it recently.

David Newson: Because someday you actually have to pay for it.

Dave Campbell: Well, someday you do. And maybe it’ll be our children that have to pay for it, but someone’s going to.

David Newson: Right. Speaking of the future, what does all of this mean, Dave, and why should investors be paying attention?

Dave Campbell: When we think about deficits today and we’re trying to project what this could really mean and why investors should really be watching for some of these things, there’s three things that I typically think of that come to play. So one is, with all this debt, your taxes are going up one way or another, and I know we just had the 2018 Tax Act that reduced taxes, both for individuals and for corporations. But at the end of the day, just like we said, even if rates don’t change, it’s going to cost us more and more and more to simply pay the interest and all this debt, never mind paying the principal on it.

David Newson: Right.

Dave Campbell: So that means a greater and greater part of our budget are going to be dedicated to paying off this debt or servicing it. And unless we want these deficits to balloon, even more than we’re projecting, taxes have to go up to start paying for some of this. And that means individual rates will go up, So individuals are going to be paying more in taxes, and some of the big money who really quite frankly out there is in corporations, so their taxes are going to go up. So that’s something to kind of watch for because your taxes are going up, your returns on savings or investments are going to go down because more and more of it’s likely to be taxed. So investors really need to worry about that, taxation. The other two effects are likely to be inflation. Now, inflation, we haven’t really seen much of …

David Newson: We have not.

Dave Campbell: … in the last several years, but it doesn’t take much of an imagination to figure out some of the ways we try and get out of this will cause more and more inflation. So, for example, one of the things that we’ve heard about is, “Well the U.S. can simply print money.”

David Newson: Why don’t we just do that? And then we can pay off our debts, right?

Dave Campbell: Well, to some extent, that’s true, and we actually do print money or create electronic money almost every day. That’s what part of the Fed’s operations actually do.

David Newson: A lot of it these days.

Dave Campbell: And lots of it, lots and lots of it. But people don’t really understand what that really means. Is the Treasury really printing dollar bills just sort of 24 hours a day and flooding the market with it? Well, no. Mostly what you’re seeing happening is the Treasury wants to sell bonds to raise money to pay the deficit. The Fed as the U.S.’s bank goes to the investment banks and says, “We’re going to sell these bonds and raise cash.” But then the Fed also then turns around and as these investment banks start to purchase these bonds and resell them, the Fed steps in and buys a big chunk of them back for cash. So it’s actually creating cash for the investment banks, and that’s currency, it didn’t exist before.

David Newson: That’s right.

Dave Campbell: It’s an electronic deposit, if you will, so now it’s up to the investment banks to get that into the economy by lending it out, but it was new money that didn’t exist and it’s created.

David Newson: So if you get too much of that, what do you get?

Dave Campbell: Well, you get what Venezuela got when it started printing money. You get inflation and we want to worry about doing too much of that because it can lead to hyperinflation, as has Venezuela suffers from today. So inflation goes up, it’s going to hurt savers. We’re in a world where interest rates are near zero. That hurts savers. But inflation is just as pernicious as a zero bound interest rates. So if you’re a saver and you’re getting 2% or 3% on your money in a savings account but inflation’s running 5% or 6% or 7%, you’re losing every single year and it erodes the value of your savings over time. So you want to watch for that and be able to fight against that because that’s a real risk. Maybe not in the next two or three years, David, but certainly in the next three years and forward if we continue on this route.

Dave Campbell: The third thing that’s coming out here is that growth can be hit in the road because of all this that we’re dealing with, these big deficits and the reactions and how we respond to them. So, for example, with taxes going up, with inflation going up, you can imagine that growth is going to go down or at least the rate of growth would be suppressed or retarded a bit because of that. So when you think about companies, if their taxes are going up, their earnings are going down because they’re having greater and greater expenses to pay all these taxes. So there’s a hit to both the asset levels, maybe the stock’s not worth as much, but also you see less money available for them to reinvest or invest in new projects. So it can actually have a big effect on the growth rate of your economy. And I think this is one of the outcomes from that paper that I was referring to. Larger and larger deficits can lead to slower and slower rates of growth simply because more and more and more resources have to be turned away from productive endeavors in your economy to simply servicing all that debt. And this is ultimately where we get into a debate, if you will, between the two schools of economic theory, one which you may have heard recently, that’s modern monetary theory.

David Newson: Which kind of sounds like you can spend as much as you want and not worry about it.

Dave Campbell: I see you’ve heard of this. That’s exactly part of it. I think they have versus sort of the classical economists, there’s a lot of basic economic tenants that both schools of thought sort of buy into. So it’s not something that you can dismiss. A lot of the basic tenants of the modern monetary theory are very sound. So, for example, can the U.S. government print money? Yes, we do it all the time. And, in fact, the Fed has really wanted to see some growth in money supply. Assuming you have a growing economy, you want to be able to create enough liquidity to keep the economy growing and plenty of money to borrow all those types of things. So there’s some natural elements of all of those that I think both schools would sort of buy into. Where I think it begins to be a little bit cloudy and where I began to have a little bit of a reservation about one versus another is these assumptions that come out or that you may hear espoused like what we just talked about. Why don’t we just simply print dollars?

David Newson: We are able to do that, right? We are a reserve currency for the world. We’re a strong and the largest economy in the world. It seems we could do this without too many issues.

Dave Campbell: The answer is, well, maybe in the short run and for a limited amount and a limited time. I think that’s exactly right. But you can’t do it indefinitely and in unlimited amounts. Our borrowing ability is not unlimited. There’s got to be some limit out there, and with these signals turned off, we really don’t know where that is. So we have to be quite careful about that.

David Newson: Sure.

Dave Campbell: I think at the end of the day, it could even lead into questions about how we choose to respond to both the economic environment we’re in but also this deficit and debt overhang that we have will help determine what kind of society and perhaps even what kind of economic system and government we ended up having.

David Newson: Interesting.

Dave Campbell: Whether you have more and more government participation in the economy where it becomes the employer, for example, which I think a lot of modern monetary theory sort of leads down that road. Certainly, the progressive end of the political spectrum leads down that road more and more.

David Newson: Right.

Dave Campbell: And therefore, a planned economy, government owns a lot versus what we’ve always talked about in the U.S. anyway, which is we are more of a democratic government rather than socialist, if you will, and we have an entrepreneurial economy and a capitalist system with free and competitive markets. So big consequences if you continue on this type of road down over the intermediate and longer term, if you don’t make some harder choices today.

David Newson: To that point, given the current state of our culture and unrest that we’re seeing, I was just seeing an article in the Atlantic the other day that was talking about the next iteration of capitalism in the United States and attempting to consider what that might look like. I think sometimes socialism in this country sounds like heresy, but it will be interest.

Dave Campbell: I think there will be a tremendous amount, and probably already is taking place in boardrooms, a lot of soul searching about, what are we really about? What is this company about? What does capitalism really mean? How do we make capitalism better? That has to be taking place today, yeah.

David Newson: Sure, and I think those are good, long overdue conversations to be had, perhaps.

Dave Campbell: Yeah, I agree.

David Newson: So, Dave, what are we doing about all of this at B|O|S?

Dave Campbell: Well, in some ways, we’ve actually already begun to address this for the last several years. For example, we’ve looked at interest rates, we’ve looked at this potential for short term inflation, which we think is fairly benign versus intermediate and longer-term inflation and interest rates. For example, for our clients, when we look at their portfolios and we talk specifically about where that can hurt the most or be more problematic, it’s really in the bond side of their portfolio. So if there’s any cash funding that needs to be made, we may be funding that, or pre-funding that for longer periods than we might have in the past. So cash is truly king right now, if you’ve got cash, you’re feeling pretty good. You’ve avoided a lot of the market gyrations.

David Newson: Sure.

Dave Campbell: Even if you’re not earning any real rate of interest on your cash right now, you’re not really losing that because inflation is very, very low and interest rates, even on bonds are at least the high quality bonds are very, very low. So cash, maybe even for as much as a year or two of anticipated spending is not a bad thing to have. And even when you go into the bond side of the portfolio, we’ve for several years now have done two things we focused all on high quality bonds. So we haven’t got into the lower credit rating types of bonds. And those are the ones that got into real problems and could get into more problems, if we get into or revisit sort of economic recessionary type of mode that we’re still sort of in now.

Dave Campbell: We’ve also focused on shorter maturities, which means we want those bonds to be stable in the portfolio. We want them to be the shock absorbers. If stocks really take another hit. One way to do that is to shorten up the maturities. So if interest rates are bopping around, up and down and inflation’s going up and down, we want those bonds to be stable. One way to do that is shorten up the maturities. You get a good, significant amount of those bonds maturing every year, and you’re able to reinvest at those new interest rates. So it’s kind of shield you from that a sort of serve and effect.

Dave Campbell: We also do a few other things, which I know you’ve seen David. So we were talking about, well, what happens if inflation rises down the road and interest rates rise, how do investors sort of cope in that type of world? Well, in that type of world, you’re going to need some different types of assets that can provide growth that help fight and offset the effects and help you beat inflation. Because that’s the goal at the end of the day is you want your money to really beat inflation and grow faster than that. So you’re really growing your true real wealth. That means different types of stocks, different types of bonds, and even other types of assets that can help you do that. So for example, we’ve used in addition to basic stocks and bonds, other types of hard assets that tend to do well in inflationary environments, when that’s been a problem, gold is one of the ones that people tend to think of as an inflation hedge.

Dave Campbell: It holds its value in an inflation world, but it can mean other types of assets. Value stocks traditionally have held up a little bit better in an inflationary world than growth stocks, real assets, such as real estate have also done the same thing. So we’ve looked at those types of things. We’ve also been adjusting portfolios watching in today’s world assets that have really, really done well. So if I were to ask you David, what do you suspect is the sort of the best performing asset in the markets today? What might you say?

David Newson: Tech stocks?

Dave Campbell: Tech stocks is the classic example today, right? They’ve really been going through the roof. They have been for a few years now. You’ve heard of the term FANGs, the Facebook and Apple and Amazon and all those of the world.

David Newson: Netflix. Yeah.

Dave Campbell: They’ve really dominated the US markets, especially the last few years, but their prices have really been up to, right?

David Newson: Sure.

Dave Campbell: So the expectations are very high and that’s how the prices are being justified. So if they disappoint, they get hammered right away. So we look at those types of relative pricings and look at other assets, choices that you have and find that there are other assets that are relatively cheap compared to those. So we stick to a discipline of selling a little bit of those winners when they’re very, very high and taking those proceeds and buying some assets that look pretty cheap in comparison. So selling high, buying low, it’s the way you make money. So we’ve been helping our clients stick to that discipline throughout this whole time period.

David Newson: David, if I were to ask you what you would like a listener to take away from this episode, what is the number one thing that you want them to leave with?

Dave Campbell: I guess my answer to that David would be, there’s no free lunch, right? If you want your government to continue to borrow and spend at the rate we have been, at some point, we’re going to have to pay the piper for that and it can be in a variety of ways. It can be a hyperinflationary world. It can be a world down the road where we realize we can’t spend at that level and services get cut. They can be pretty painful, or it can be we’re burdening our children with a lot of debt payments that we got to enjoy, but they have the burden of paying off for us. So we really need to think about it quite seriously. We need to get back and we’ve all been talking about this world of the big issue of being sustainable. Sustainable energy and sustainable agriculture. Well, we need to get back to a world of sustainable government and what we have right now, isn’t really sustainable. We need to realize that and address that and the sooner, the better.

David Newson: Fantastic. Thank you, Dave. Thanks so much for your insights.

Dave Campbell: Thank you, David, and pleasure to be here with you.

David Newson: This is where my interview with Dave Campbell concluded. We continued chatting for a few more minutes and I thought you might find the following interesting.

Dave Campbell: Coming out of the ’70s, we’re in stagflation, right? Inflation’s really high and the expectation is it’s going to stay high and the economy’s in the doldrums. It’s just not really growing. And two things happen Carter to his credit appoints, Volcker as the fed chairman, just before he’s going out the door. Reagan gets elected and essentially gives Volcker political backing to get rid of inflation. The only way to do it is to jack up interest rates really high to not only kill off current inflation, but to kill off the expectation of inflation down the road. The cost of that was a recession that drove unemployment to 10.8% or whatever that chart says. So there was some pain involved there, but the idea was, we’ve lived with this for over a decade now it’s not getting better until we address it. It’s just going to get worse and worse. So let’s take the bitter pill now, right?

David Newson: Let’s take the hit now.

Dave Campbell: Right. It’s similar now we can address this, but there’s going to be a bitter pill to swallow, but it’s a smaller pill than it will be 10 years from now, that type of thing. So, there’s ways to go about this. It’s just how willing are we to sort of step up and recognize that and swallow that pill, right?

David Newson: On top of all of the other pills we have to swallow right now.

Dave Campbell: That’s right. But we’re sheltering at home worrying about our health.

David Newson: Exactly. I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode, please subscribe with your favorite podcast app, your Alexa enabled device, or visit bosinvest.com/podcasts. See you next time.

27.  SECURE Act Benefits 529 Plans

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Saving for college can be a daunting task for any family. Fortunately, there are several tax-advantaged savings vehicles available to help like Section 529 plans. 529 college savings plans offer tax-free growth, donor control, and hassle-free administration. Owners of 529 plans benefit from tax-free growth by using the plan’s funds for qualified education expenses such as tuition, fees, books, and room and board. Today’s episode shares two ways that the SECURE Act has enhanced the benefits of 529 college savings plans

Show Notes:

The following are important footnotes from this episode:

1 Please note that the state of California has not adopted this federal change under the TCJA. Using 529 plan funds for this purpose will result in California income tax and a 2.5% penalty on the earnings portion of the withdrawal.

2 It’s important to consult your CPA to understand all tax implications and potential penalties related to the use of 529 plan funds.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode shares two ways that the SECURE Act has enhanced the benefits of 529 college savings plans and was written by B|O|S Wealth Manager Sean Angelis.

Saving for college can be a daunting task for any family. Fortunately, there are several tax-advantaged savings vehicles available to help like Section 529 plans. 529 college savings plans offer tax-free growth, donor control, and hassle-free administration. Owners of 529 plans benefit from tax-free growth by using the plan’s funds for qualified education expenses such as tuition, fees, books, and room and board. Distributions used for nonqualified expenses, however, incur ordinary income tax and a 10% penalty on the earnings portion of the plan but not on the contributions.

The core features of 529 plans have remained intact since their inception, but recent legislation has modified these plans in largely positive ways. The 2017 Tax Cuts and Jobs Act allows families to now use 529 plan funds of up to $10,000 per year per beneficiary for tuition at private and religious K-12 schools.1 The recently enacted SECURE Act also broadened 529 plan qualified expenses to include apprenticeships and qualified education loan repayments.

The SECURE Act is a bipartisan retirement bill included in a larger government spending bill that was signed into law in December 2019. The legislation includes many provisions that affect the way we currently plan for retirement, including taking required minimum distributions, inheriting IRAs, and making IRA contributions later in life. While the SECURE Act affects many aspects of retirement, it also touches 529 plans.

The SECURE Act positively impacts 529 plans in two key ways. First, it expands qualified tuition expenses to include apprenticeship programs that are registered with or certified by the Department of Labor. Second, 529 plan assets can be used for the repayment of qualified education loans, up to a lifetime limit of $10,000, not adjusted for inflation. Even better, an additional $10,000 can now be used to repay the education loans of a 529 plan beneficiary’s siblings, though any interest on education loan debt paid with 529 plan funds will no longer be tax-deductible. These changes offer families much more flexibility with how 529 plan funds are ultimately used. To illustrate the impact of the new education loan repayment rule, let’s look at a family with three children. The parent, or parents, can now use $30,000 from each child’s 529 plan to pay $10,000 toward one child’s student loan and that of her or his two siblings. For this family, that’s $90,000 of 529 plan assets that can now be utilized for education loan repayment in contrast to $0 before the SECURE Act.2

If you would like to learn more about how the SECURE Act changed 529 plans or about 529 plan accounts in general and whether they are appropriate for your situation, please contact a member of your B|O|S team.

Please see the show notes for important footnotes from the original article, “SECURE Act Benefits 529 Plans”.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

26.  B|O|S Flash Briefing: July 27, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, July 27th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

The U.S. stock market was relatively flat last week despite a slew of high-profile earnings announcements during the week. The technology sector continues to be the best performing sector year-to-date but underperformed the S&P 500 Index for the second week in a row. The tech-heavy NASDAQ 100 Index registered its second consecutive weekly loss for the first time in almost five months. Earnings announcements last week from Microsoft, Intel, and Tesla generally surpassed expectations but these companies’ stock sold off shortly after their respective announcements. Tesla announced a net profit for the quarter which means they now qualify for potential inclusion in the S&P 500 Index. If this occurs, Tesla will be the largest company by market capitalization ever added to the S&P 500. Through the end of last week, about one-quarter of the companies in the S&P 500 have reported second quarter earnings. This week will be the busiest of the earnings season as approximately 35% of companies in the S&P 500 Index will be reporting. On Thursday, July 30th Apple, Amazon, and Google are scheduled to announce. These companies combined make up about 15% of the S&P 500 Index and about 40% of the NASDAQ 100 Index so Thursday may go a long way in determining the short-term direction of the U.S. stock market.

The rally in gold has continued, with the price reaching an all-time high on Monday July 27th of $1,939 per ounce. Silver, which has lagged gold during the rally, spiked higher last week but is not yet close to an all-time high. The demand for gold has continued to increase as real interest rates dropped lower and the value of the U.S. dollar has continued its recent slide. Last week, the yield on the U.S. 10-Year Treasury Bond dropped to as low as 0.58% while expected annual inflation over 10 years rose to about 1.5%. These two numbers taken together suggest a negative inflation-adjusted return for Treasury bonds over the next 10 years which makes non-income-producing assets like gold more attractive. The demand for commodities including gold and silver also tends to rise when the value of the U.S. dollar falls. These commodities are priced in U.S. dollars for all global investors so the dollar’s decline makes gold and silver cheaper for non-U.S. investors. The value of the U.S. dollar has been sliding partially due to the negative real interest environment and our ongoing struggles with COVID-19.

This week could be a particularly volatile one for various markets as there are a number of potentially significant events besides the large volume of earnings reports. The U.S. Federal Reserve meets this week followed by a press conference by Chairman Powell on Wednesday. There is no significant change in policy expected but any surprises during the press conference could drive markets. We will also get our first look at U.S. second quarter GDP growth, or lack thereof, on Thursday morning. The current consensus is for U.S. GDP to contract by approximately 35% on an annualized basis, which would be a record decline. Markets are probably already looking past this data as it was expected to be unusually bad. The focus now is how much improvement will occur during the present quarter and happenings in Washington this week may help answer that question. Much of the fiscal stimulus in response to COVID-19 expires on July 31st and negotiations between Republicans and Democrats are in full swing. Their success or failure in extending current programs and drafting new legislation will have a potentially large impact on U.S. economic data going forward and will be very closely watched.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also referenced the NASDAQ 100 Index, which is a modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. An index is unmanaged and not available for direct investment.

25.  B|O|S Flash Briefing: July 20, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, July 22nd, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks have continued to rise despite a significant rise in COVID-19 infections in the United States. The S&P 500 Index is now at levels not seen since the beginning of the COVID-related lockdowns in late February. It has not been unusual for the market to rise despite a worsening economic situation as investors have come to expect additional monetary and/or fiscal stimulus if the economy worsens. What was different about last week were the types of companies that were driving the gains. Large, new economy technology stocks actually underperformed more boring stocks like banks and industrial companies during the week ending July 17th. This was driven in part by better-than expected second quarter earnings releases from large financial institutions such as JPMorgan, Goldman Sachs, and Morgan Stanley. Conversely, new economy stocks declined last week partially due to a ruling by a European Union court that struck down a cross-border agreement with the U.S. regarding data privacy of EU citizens. The ruling is expected to have an impact on companies that house EU consumer data on servers located in the United Staes. Companies such as Amazon, Google, and Facebook may be affected by this ruling.

The average national rate of a 30-year conventional mortgage dipped to 2.98% last week which is the lowest rate in the 50-year history of the data. The rate began the year at 3.72% but has dropped precipitously as the yield on U.S. treasury bonds dropped to historic lows. The rate on jumbo loans has not dropped nearly as much this year. The current average rate of a jumbo loan in the U.S. is approximately 3.75% which is close to where it was when the year began. Some financial institutions placed new restrictions on jumbo loans since the crisis began and that has kept rates high relative to government-guaranteed conventional mortgages. In normal circumstances, low mortgage rates usually lead to more home buying activity but sales of existing homes have sharply declined during the crisis. Recent data from the National Association of Realtors showed sales of existing homes in May dropped 9.7% from the previous month after dropping 17.8% in April. Prices, however, have surprisingly held up in many areas because of a lack of supply.

Tesla will announce their second quarter earnings on Wednesday July 22nd after the market closes. There is a lot at stake on the results of this particular announcement. Tesla shares are up approximately 300% year to date and some of the frenzied buying has been focused on the expectation that Tesla will be added to the S&P 500 Index this year. Tesla is currently not included in that index because inclusion is dependent on having four consecutive quarters of positive earnings. Tesla has had positive earnings for three consecutive quarters and, if the announcement on Wednesday shows positive earnings, they will be eligible for inclusion. If Tesla is added to the S&P 500 Index, it would be the 12th largest company in the index and passively-managed index funds would have no choice but to add it to their funds resulting in potentially huge demand for the stock. The consensus among analysts that follow the stock is that Tesla will have negative net income for the quarter. That said, some analysts expect Standard & Poor may just add the stock anyway as their rules say the committee can override the inclusion parameters at their discretion although Standard & Poor says they have never done so.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

24.  Q2 2020 Quarterly Summary

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Stocks surged higher in the second quarter of 2020, a rally all the more remarkable given the almost total absence of reassuring economic news. Just as the speed of the decline in the stock market in the first quarter tested historical precedent, second quarter gains were equally worthy of the history books.

Show Notes:

The complete Quarterly Summary is available on the B|O|S website here.

The following are important footnotes from this episode:

1. References to the S&P 500 refer to the S&P 500 Total Return Index which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. The index includes the reinvestment of dividends. An index is unmanaged and not available for direct investment.

2. Source: Bloomberg.

3. ‘S&P 500 Index – 90 Year Historical Chart’; https://www.macrotrends.net/2324/sp-500-historical-chart-data

4. JPMorgan Guide to Markets, June 30, 2020, page 25.

5. Russell 1000 Value Index: A market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. An index is unmanaged and not available for direct investment.

6. Russell 2000 Index: A market capitalization-weighted index of U.S. small cap stocks that consists of the 2,000 smallest publicly traded stocks in the Russell 3000 Index. An index is unmanaged and not available for direct investment.

7. MSCI EAFE Index: A market capitalization-weighted index that captures large and midcap companies in developed countries around the world, excluding the U.S. and Canada. An index is unmanaged and not available for direct investment.

8. Source: MSCI. Return shown for China is the return of the MSCI China Index for the first two quarters of 2020. The MSCI China Index is an index of large and mid-cap companies domiciled in China and covers about 85% of the China equity universe. An index is unmanaged and not available for direct investment.

9. Bloomberg Barclays US Aggregate Bond Index: A broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. An index is unmanaged and not available for direct investment.

10. Bloomberg Barclays Municipal Bond Index: An Index that covers the USD-denominated long-term tax exempt bond market. The index includes state and local general obligation bonds, revenue bonds, insured and prerefunded bonds. An index is unmanaged and not available for direct investment.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode covers a review of securities markets for the second quarter and was written by B|O|S Principal Jeff Lancaster.

Stocks surged higher in the second quarter of 2020, a rally all the more remarkable given the almost total absence of reassuring economic news.  Just as the speed of the decline in the stock market in the first quarter tested historical precedent, second quarter gains were equally worthy of the history books. Specifically, after hitting the bottom on March 23 the S&P 5001 rose by an astonishing 40% over the next 100 days.2 The last time a similarly huge gain was posted this quickly was 1933.3 (That rally did not work out well for long. 18 years later stock prices were lower.)

With countless businesses around the world closing their doors to employees and customers alike, investors turned their gaze elsewhere and were seemingly cheered by the anticipated future economic effect of massive governmental intervention. In the United States alone the federal government spent almost $300 billion on recovery rebate checks, an incremental $270 billion on unemployment benefits, $760 billion on small business relief (mostly subsidization of payroll and rent,) $425 billion on health-related spending, $150 billion on direct aid to state and local governments, and more than another $500 billion on, as it were, this and that. The total spend of roughly $2.4 trillion equates to almost 12% of GDP.4

Not to be outdone, the Federal Reserve was yet more aggressive. Since March 3 it has cut the federal funds rate (the rate banks pay to borrow from each other) by a total of 1.5% and down to a range very close to zero. The federal funds rate indirectly affects longer-term rates, and lower rates benefit those who seek mortgages, auto loans, home equity loans, and so on. The Fed has also pledged to keep rates low until maximum employment is achieved. Since the official unemployment rate in June was 11.1% that is likely a long time, indeed.

In addition to cutting rates, the Fed expanded its balance sheet to over $6 trillion via the purchase of Treasury securities, mortgage-backed securities, municipal bonds, investment grade and even (indirectly) junk bonds. By means of analogy, imagine losing your job and trying to raise cash by holding a garage sale. It’s not going well but then Bill Gates pulls up in his Ferrari, points cheerfully at every last thing in your driveway and says, “I’ll take all of it. Even the leaky garden hose. And I’m not especially curious about your prices.” That would be a good day for you, and it helps explain why even dodgy bonds did well in the second quarter.

This spending, borrowing and lending spree helped power the S&P 500 to a second quarter gain of 20.5%, which in turn dropped half-year losses down to 3.1%. The average S&P 500 stock fell almost 11% in the first half but the index is capitalization weighted, which means that the biggest companies drive the overall return. Value stocks, as represented by the Russell 1000 Value Index5, rose 14.3% in the quarter but still fell 16.3% in the first half of the year. Small company stocks also popped in the second quarter, rising almost 25.4%, bringing half-year losses in the Russell 2000 Index6 to 13.0%.

Government spending and central bank activism was common to one degree or another throughout the world’s dominant economies, and in part for this reason foreign stocks also recorded double digit gains. The MSCI EAFE Index7 of foreign stocks rose 14.9% for the quarter, dropping first half losses to 11.3%. In light of arguments about the origins of the COVID virus, it is remarkable that among the world’s best performing stock markets in the first half of 2020 was that of China, which actually rose 3.5%.8

In the bond market, lower yields pushed prices higher. The Aggregate Bond Index[i] rose 2.9% in the quarter and was up 6.1% for the half-year. Municipal bond markets stabilized during the quarter and the National Muni Bond Index10 rose more than 2.7% after having fallen modestly in the first quarter. Many states are staring at big budget problems and, unlike the federal government, the states can neither run deficits nor print money. In this election year, the odds are excellent that swing state governments are going to be wined and dined by Washington politicians. There will be at least one more round of big transfers to states and local governments.

Commodities markets often tell an interesting story. Gold rose 13.0% in the quarter for a 17.1% year-to-date rise, making it among the world’s best investments thus far in 2020. At the other end of the spectrum, the price of physical oil and gas fell by double digits in the quarter. The energy sector of the S&P is down 35.3% for the half-year.

A Pony Somewhere

The set-up for an old joke is that parents take their insanely optimistic boy to see a psychiatrist. Seeking to persuade the child that he lives in an often harsh world, the doctor escorts him to a room filled with nothing but manure. But rather than show discouragement, the boy clambers to the top of the pile and starts to dig. “What are you doing?” the psychiatrist asks. “With all of this manure,” the boy happily replies, “there must be a pony in here somewhere.” In the current environment, some have wondered if buyers of stocks are perhaps guilty of looking for their own pony.

It is in fact often the case that every investment signal seems to point in the same direction, be it good or bad. In the seemingly ancient history that was 2019, for example, the strength of the U.S. economy and the stock market alongside it seemed all but unstoppable. We recall that when asked about their single greatest problem, businesses complained about a lack of workers. For their part, many workers complained that their commuter trains and freeways were too crowded. That was then, as they say.

The news that accompanied the big stock market gains of the second quarter, by contrast, was almost always of a kind that leads to lower prices – sometimes much lower. On the domestic scene, we confronted unimaginable levels of unemployment, yawning economic inequality and (for some) new and unanticipated fears of domestic unrest. In part for these reasons, Joe Biden surged to a big lead in the polls while promising to increase corporate taxes dramatically – a political candor last displayed by Walter Mondale prior to his 49-state loss to Ronald Reagan in 1984. We have no dog in any fight over tax legislation, but all else being equal, investors should demand lower prices for corporations that may soon pay more in taxes. Overseas developments might have been expected to hurt stock prices, too. We recall that when stocks plunged in the 4th quarter of 2018, the primary explanation proffered at that time was that investors were nervous about the risk of a U.S.-China trade war, including costly tariffs. But news on the trade front also got significantly worse in the most recent quarter. Indeed, Donald Trump and Joe Biden compete to show who will be tougher on China.

In the second quarter, therefore, investors looked beyond many traditional sources of concern in bidding up stock prices. At times like these, it is helpful to remember how quickly investor psychology can change from optimism to pessimism. This moment is filled with uncertainty for which broad diversification is the sensible response.

Please see the show notes for important footnotes from the original Quarterly Summary.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

References to the S&P 500 in this episode refer to the S&P 500 Total Return Index which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. The index includes the reinvestment of dividends. This episode references the Russell 1000 Value Index, which is a market capitalization-weighted index composed of constituents in the Russell 1000 Index with low price to book ratios and lower forecasted growth rates. It also references the Russell 2000 Index, which is a market capitalization-weighted index of U.S. small cap stocks that consists of the 2,000 smallest publicly traded stocks in the Russell 3000 Index. Additionally, the episode references the MSCI EAFE Index, which is a market capitalization-weighted index that captures large and midcap companies in developed countries around the world, excluding the U.S. and Canada. The episode also references the Bloomberg Barclays US Aggregate Bond Index, which is a broad-based bond index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government agency bonds, corporate bonds and securitized fixed income securities. Finally, the episode references the Bloomberg Barclays Municipal Bond Index, which is an index that covers the United States Dollar-denominated long-term tax exempt bond market. The index includes state and local general obligation bonds, revenue bonds, insured and prerefunded bonds. An index is unmanaged and not available for direct investment.

23.  Navigating Key Provisions Of the CARES Act

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Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, provides economic relief to individuals and businesses negatively impacted by the coronavirus pandemic. While the bill contains provisions relating to retirement accounts and distributions, it also covers a variety of other provisions beneficial to individuals and small businesses. Today’s episode provides examples of how individual and small business tax rates can stand to benefit from provisions within the CARES Act.

The following are important footnotes from this episode:

1 The IRS’s list of qualifying medical and dental expenses can be found at: https://www.irs.gov/taxtopics/tc502.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode provides examples of how individual and small business tax rates can stand to benefit from provisions within the recently enacted CARES Act and was written by B|O|S Estate Planning Advisor, Judith Gordon.

Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, provides economic relief to individuals and businesses negatively impacted by the coronavirus pandemic. While the bill contains provisions relating to retirement accounts and distributions, it also covers a variety of other provisions beneficial to individuals and small businesses. Some of these other key provisions of the CARES Act include:

Tax Rebates

The CARES Act provides for a rebate of up to $1,200 for an individual taxpayer whose adjusted gross income, or AGI, is below $75,000 and up to $2,400 for joint filers whose AGI is below $150,000. Qualifying taxpayers with children also receive $500 for each child. To qualify for the maximum rebate amount, a taxpayer cannot be a dependent of another taxpayer and must possess a work-eligible Social Security number. To the extent income exceeds the threshold amounts, the eligible credit is phased out at a rate of $5 for every $100 above the AGI threshold amount. The AGI phaseout for a single person with no children is $99,000 and a married couple with no children is $198,000.

The rebate is considered a 2020 tax credit, but it is being distributed in the form of an advance payment and computed based on adjusted gross income reported on one’s 2019 income tax return. If the 2019 tax return has not yet been filed, the credit will be based on 2018 adjusted gross income.

Tax Deductions for Charitable Giving

Implication #1: A $300 above-the-line deduction for those who take the standard deduction.

If a taxpayer takes the standard deduction on their 2020 tax return, the taxpayer can claim an “above the line” deduction of up to $300 for cash donated to public charities. This means that up to $300 can be deducted from a taxpayer’s gross income, which reduces their taxable income. Contributions to donor-advised funds and supporting organizations do not qualify for this charitable deduction.

Tax Deductions for Charitable Giving Implication #2: Percentage of adjusted gross income limitation for charitable contributions increased for those who itemize.

The CARES Act increases the maximum deduction amount for cash donations made to public charities in 2020 from 60% of adjusted gross income to 100%. Any donations in excess of this limit can be carried over for up to five years. Contributions to donor-advised funds and supporting organizations do not qualify for the deduction. However, individual donors can still deduct up to 60% adjusted gross income in cash given to a donor-advised fund and up to 30% adjusted gross income in appreciated assets contributed to a charity. Excess deductions can be carried forward for up to five subsequent tax years.

For corporations, the maximum 10% limit was increased to 25% of the corporation’s taxable income.

Tax Deductions for Charitable Giving Implication #3: IRA Qualified Charitable Distributions Planning Opportunity.

The CARES Act did not change the rules concerning Qualified Charitable Distributions. Individuals over the age of 70 ½ can donate up to $100,000 annually in IRA assets directly to charities, without including the distribution in taxable income.

Since under the CARES Act an individual can elect to deduct up to 100% of adjusted gross income for cash charitable contributions to public charities, individuals over 59 ½ can avail themselves of benefits similar to a Qualified Charitable Distributions. For instance, they can take a cash distribution from their IRA, contribute the cash to a public charity, and completely offset the tax attributable to the distribution by taking a charitable deduction in an amount up to 100% of their adjusted gross income for the tax year.

For those between the ages of 59 ½ and 70 ½ who want to make a large donation in 2020, this may be a useful strategy to consider depending on the size of one’s retirement account and other assets.

Tax Deductions for Charitable Giving Implication #4: Roth Conversion and Charitable Contributions.

Given recent losses in value of assets in traditional IRAs, it may be beneficial to convert some of those assets to a Roth IRA. The income tax due at the time of the conversion is computed on the lower valuation of the assets and an individual gains access to future tax-free growth with no required minimum distributions. Further, under the CARES Act, there is now a 100% adjusted gross income limitation for cash gifts to public charities. Converting to a Roth IRA will create additional adjusted gross income for the 100% of adjusted gross income limit. The amount of the resulting income tax liability on the Roth conversion can be gifted to charity. This technique allows the donor to direct their tax dollars to a more favored cause.

Medical Expense Deduction

The CARES Act eliminates the medical expense deduction requirement that says taxpayers can only deduct the amount paid for medicine or drugs pursuant to a prescription. As a reminder, for 2020 federal tax purposes, the IRS allows a taxpayer to deduct the total qualified unreimbursed medical care expenses for the year that exceed 7.5% of adjusted gross income. The IRS’s list of qualifying medical and dental expenses can be found at the link contained in the show notes.1

The Small Business Paycheck Protection Program

Through the Small Business Administration, the CARES Act also established the Paycheck Protection Program, which provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The funds are distributed as loans via banks participating in the Small Business Administration program. Part or all of the loan amount may be forgiven if used for the specified purposes.

Additional CARES Act Tax Savings Opportunities

The CARES Act provides opportunities to potentially amend prior year tax returns to generate cash tax savings in the following situations:

#1: Five-year net operating loss carryback for losses generated in 2018, 2019, and 2020 tax years.

#2: Repeal of the excess business loss limitation for taxable years beginning before January 1, 2021.

#3: Application of 50% (versus 30%) of adjusted taxable income limit in computing business interest limitation for 2019 and 2020.

#4: Application of 100% bonus depreciation to qualified improvement property placed in service after 2017.

If you are interested in learning more about these provisions and how they might benefit you, please contact your B|O|S wealth management team, your attorney, or your accountant.

Please see the show notes for important footnotes from the original article, “Navigating Key Provisions of The CARES Act”.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

22.  B|O|S Flash Briefing: July 13, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, July 15th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks continued to rise despite a spike in cases of COVID-19 in the U.S. As of July 13th, the S&P 500 Index is now very close to even for the year after being down as much as 31% on March 23rd. The current rally continues to be led by the technology sector and just a few ‘new economy’ stocks. The technology-heavy NASDAQ 100 Index is currently trading at all-time highs and is up about 25% for the year. A disproportionate majority of the gains in that index continues to come from just a few stocks. 5 stocks account for approximately 70% of the year-to-date gains in the NASDAQ 100 Index. Among those 5 stocks are some of the largest companies in the world including Amazon, Apple, and Microsoft. Tesla is also one of the top 5 contributors in the NASDAQ 100 and is up about 270% for the year. Tesla recently surpassed Toyota as the most highly valued auto company in the world with a market capitalization of approximately $285 billion. Toyota is currently expecting to sell approximately 9 million cars this year while Tesla is expected to sell around 400,000 cars in 2020.

2nd quarter earnings season goes into full swing this week as a number of large banks will announce their 2nd quarter results. Investors are likely to focus more on any forward guidance than the actual 2nd quarter results which are already expected to be historically horrible. Analysts’ expectations for 2nd quarter earnings of the companies in the S&P 500 Index vary widely but earnings could be down as much as 40%-50% from a year ago. Once the COVID-19 crisis began, many companies withdrew their previous guidance and have been reluctant to provide any visibility going forward. A new spike in COVID-19 cases in the U.S. may lead many companies to continue to refrain from any detailed guidance in their conference calls with investors this quarter.

Since late May, the stocks of companies in emerging markets have done significantly better than the stocks of companies in developed countries. The MSCI Emerging Markets Index is up approximately 16% since May 31st while the MSCI World ex US Index is up approximately 5%. A great deal of the outperformance is due to the performance of China which is up about 23% since the end of May. China makes up about 40% of the MSCI Emerging Markets Index and is up about 17% year-to-date making it the best performing country of all emerging and developed markets in the world. Stocks in China began to rally once it became evident that COVID-19 was under control. Like the U.S. and Europe, China also implemented huge stimulus programs to try to offset the economic impacts of the virus. China is now the only major economy that is expected to show economic growth in 2020, according to a recent forecast by the International Monetary Fund.

Under normal circumstances, you would expect Treasury bonds and gold to be selling off when the stock market rallies as sharply as it has recently. Buying stocks normally suggests that investors have some optimism about the economic future, while buying Treasuries and gold suggests pessimism and the desire for safety. This relationship between stocks and safe haven assets has not held during the current stock market rally. Since the low on the S&P 500 Index was hit on March 23rd, Treasuries are up about 1% and gold is near an all-time high. This suggests many investors are not as optimistic about the current situation as the stock market would indicate.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also references the NASDAQ 100, which is a modified market capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ exchange. No security may have a weighting of greater than 24%. Lastly, the episode also referenced the MSCI Emerging Markets Index, which is a market capitalization-weighted index that captures large and midcap companies in emerging market countries around the world and the MSCI World ex US Index, which is a market capitalization-weighted index that captures large and midcap companies in developed countries excluding the United States. An index is unmanaged and not available for direct investment.

21.  Estate Planning for Young Adults

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This episode provides an overview of the various medical and financial decisions faced by young adults and strategies to set them up for success.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode provides an overview of the various medical and financial decisions faced by young adults and strategies to set them up for success and was written by B|O|S Estate Planning Advisor, Judith Gordon.

At age eighteen, children have reached an important milestone. They are now young adults in the eyes of the law and can take charge of their health care, finances, and enter into legal contracts without a parent’s consent or assistance.

Medical Decisions

A young adult has a right to the privacy of their health information, which prevents others, including parents, from accessing their child’s information. So even if a young adult has a medical emergency, their doctor may have no responsibility to contact the parents and may even be legally prevented from doing so. One good way for parents to stay informed and maintain involvement in their child’s health care decisions is to have the young adult sign a HIPAA Release. HIPAA, which stands for Health Information Portability and Accountability Act, is a law that creates strict privacy protections for medical information.

By signing a HIPAA Release, the young adult gives their doctors permission to share health information with their parents. This allows a young adult’s doctors to alert the parents when he or she has a new medical condition. It also gives the doctors permission to share diagnoses and discuss options for their treatment.

For even more security, a young adult should also sign an Advance Health Care Directive. The Advance Health Care Directive authorizes a health care decision maker and authorizes doctors to inform and consult with the agent for health care if the young adult is not able to make decisions.

For young adults who are attending college or live in a state other than their parents, it is wise to check the state of residence for forms relevant to the home state. Parents may wish to keep a signed copy of the health care documents on their phone or computer where their documents will be readily available if needed.

Financial Decisions

Many young adults have begun to accumulate wealth from their careers and receipt of gifts or inheritances. Distributions may have been or should be made to them from irrevocable trusts that have terminated because of age requirements or custodial accounts distributed into their names.

Many young adults have not even thought about planning for incompetency or death. With simple planning, an individual’s intentions can be implemented and legal costs and complications minimized.

A durable general power of attorney will allow a person appointed by the young adult to act on their behalf, should they become incompetent or incapacitated. If it should become necessary to go to court to have a manager appointed, a nomination of conservator names the individual for the court to consider appointing to provide a manager for the financial affairs or the personal care of the young adult.

A will can be made so that in the event of a death, the individual’s wishes as to the disposition of their assets are followed. In California, if the young adult has an estate of $166,250, creating a revocable trust should be discussed. Holding title of the financial assets in a revocable trust will (1) keep the assets separate from joint property acquired during marriage; and (2) avoid the initiation of a probate proceeding to transfer the assets in the event of a death. The terms of the will and trust can be amended as the individual’s circumstances, such as marriage or children, change.

Digital Assets

Young adults use the internet and on-line storage for almost everything. Photos, social media accounts, shopping sites with stored credit card information, and bank accounts are all a part of one’s digital assets. Sharing where this information is stored or using a service that securely stores passwords will allow access to this information when needed. In addition, one may wish to name a digital executor, a tech savvy person who is responsible for managing digital assets if one dies or becomes incapacitated.

Even without a spouse or family, with planning and the execution of a set of legal documents, young adults can begin to build a foundation for their health and financial well-being.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

20.  B|O|S Flash Briefing: June 29, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, July 1st, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks, as measured by the S&P 500 Index, dropped approximately 3% during the week ending June 26th as it became evident that the fight against COVID-19 was far from over. Data on confirmed cases and hospitalizations showed a major increase from the prior week as new outbreaks across the Sunbelt more than offset the recent declines in cases in the greater New York City area. As a result, some states have decided to slow down or postpone their plans to gradually reopen their economies. Some corporations have also changed their plans given the new spike in COVID-19 cases. Apple elected to reclose stores in several states and Disney announced they would be postponing the planned opening of their theme park in California which was scheduled to reopen in July. While few expect the economy will fully shut-down again, the recent news decreased the likelihood of a V-shaped economic recovery in the United States and the market sold off as a result.

The Federal Reserve announced the results of its latest round of stress testing on U.S. banks on June 25th and the announcement led to a sell-off in bank stocks. The Fed report showed that U.S. banks were well capitalized overall, but the Fed expressed concerns about the worst-case scenario where the economy takes longer to recover. In response to that concern, the Fed announced a cap on dividends that banks can pay to their stockholders and suspended share buybacks at least through the end of the third quarter. The Fed report said that banks could lose up to $700 billion on unpaid loans in a worst-case scenario which would be greater losses than banks experienced during the financial crisis of 2008-2009. Despite the higher potential losses to banks in a worst-case scenario, banks are significantly more capitalized than they were before the financial crisis which suggests the risk of a banking crisis is low.

Foreign stocks have continued a recent trend of outperforming U.S. stocks over the last few weeks. On May 22nd, the S&P 500 Index was outperforming the MSCI ACWI ex U.S. Index for the year by about 10.5%. As of June 26th the gap has been cut by more than half and is now down to about 5%. A majority of the recent outperformance of foreign stocks has been due to the performance of stocks in the Eurozone which are up more than 11% since May 22nd. The S&P 500 Index is up only about 2% since then. Stocks began to rally in Europe after the European Central Bank announced a monetary stimulus package in early June that rivalled the U.S. monetary stimulus in size. The rally has continued as it has become evident that COVID-19 is relatively under control in the Eurozone. It has been about a month since Europe began to lift its COVID-19 related lockdowns and infections are continuing to decline in most countries.

A gentle reminder to those of you who have yet to file your 2019 federal tax return that the extended filing deadline of July 15th is fast approaching. The IRS recently announced that it will pay interest to those who file and are due a tax refund. Interest will be accrued as of April 15th and will pay an annualized rate of between three to five percent according to the Wall Street Journal. The bad news is that any interest paid will be taxable income on your 2020 return.

B|O|S Flash Briefings will be taking next week off due to the July 4th holiday but will return the week of July 13th.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also references the MSCI ACWI ex US Index, which is a market capitalization-weighted index that captures large and midcap companies in developed and emerging market countries excluding the U.S. An index is unmanaged and not available for direct investment.

19.  B|O|S Flash Briefing: June 22, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, June 24th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks continued to trend higher and have recovered more than half of the 6% decline experienced on June 11th. The S&P 500 Index rallied after the Federal Reserve announced it would begin its program of buying individual corporate bonds. This was not new news as this program was announced weeks ago, but the market was happy to see the Fed follow through on their plans even with the economy showing signs of improvement. U.S. Retail Sales data for May was released on June 16th and also provided a tailwind for stocks. The report showed an increase of 17.7% from April, which was more than double the consensus expectation by economists. This followed substantial declines in March and April retail sales due to the coronavirus.

The Technology sector continued to outperform with the tech-heavy NASDAQ Composite Index trading close to all-time highs. The NASDAQ Composite Index is up about 15% for the year while the S&P 500 Index is down about 3% over the same period. Microsoft, Apple, and Amazon account for about 30% of the value of the NASDAQ Composite Index and 14% of the S&P 500 Index. Those three stocks have each outperformed and account for approximately 60% of the gains in the NASDAQ Composite Index year-to date. Another large contributor to the gains in the NASDAQ Composite Index is Tesla, which is up about 150% this year. Tesla is not included in the S&P 500 Index due to the fact that companies have to be profitable to be considered for inclusion in the S&P 500 Index.

The price of gold has recently risen sharply and is nearing a level not seen since 2012. The demand for gold generally increases when economic uncertainty is high and interest rates are low. The price of gold is related to interest rates in two ways. First, investments in gold do not provide any income so they become relatively more competitive when interest rates are low. Second, interest rates are usually low when the economy is struggling. When economies are struggling current inflation is also usually low, which leads to an expectation that inflation will be higher in the future. Gold has historically done well when inflation expectations increase because many see it as a store of value and an inflation hedge. Inflation expectations have definitely increased. On March 19th, the market had been pricing in an expected annual inflation rate of about half of one percent over the next 10 years. As of this recording, the market is now expecting an inflation rate of about 1.3% over the next 10 years.

PG&E recently plead guilty to 84 counts of manslaughter related to its role in starting the California wildfire that destroyed the entire city of Paradise. It is extremely rare for companies to successfully be prosecuted on criminal charges and the 84 counts are among the most ever for a publicly-traded company. The most recent successful corporate criminal prosecution before the PG&E case was the prosecution of British Petroleum for the Deepwater Horizon explosion in the Gulf of Mexico in 2010. BP was convicted on 11 counts of felony manslaughter for that incident. Sentencing for the PG&E case is set to occur soon, however, senior management has been absolved of any responsibility due to the fact that the lack of maintenance that caused the incident evolved over several decades.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. It also references the NASDAQ Composite Index, which is a market capitalization-weighted index of common equities listed on the Nasdaq stock exchange. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An index is unmanaged and not available for direct investment.

18.  Preparing for Parenthood: A LGBTQ+ Quick Guide

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Like many first-time parents who are over 30, my husband and I thought we had considered everything when we decided to bring a child into our family. And like most first-time parents, we underestimated all that was involved in starting a family, particularly as members of the LGBTQ+ community.

Show Notes:

1. California Department of Social Services, “Frequently Asked Questions About Adoption,” https://www.cdss.ca.gov/Adoptions

2. Human Rights Campaign, “How Much Does Adoption Cost?” https://www.hrc.org/resources/how-much-does-adoption-cost

3. West Coast Surrogacy, “Surrogate Mother Costs, https://www.westcoastsurrogacy.com/surrogate-program-for-intended-parents/surrogate-mother-cost

4. American Pregnancy Association, “Donor Eggs,” https://americanpregnancy.org/infertility/donor-eggs/

5. Forbes Magazine, “The Cost of IVF: 4 Things I Learned While Battling Infertility,” February 6, 2014, https://www.forbes.com/sites/learnvest/2014/02/06/the-cost-of-ivf-4-things-i-learned-while-battling-infertility/#3c6a272f24dd

6. Oregon Public Broadcasting, “Fertile Ground: Why Oregon Is The Surrogacy State,” April 21, 2016, https://www.opb.org/news/series/surrogacy-oregon/surrogacy-oregon-explainer/

7. SeattleMet, “Seattle: The New Paradise for Gay Parents-to-Be,” May 28, 2019, https://www.seattlemet.com/articles/2019/5/28/seattle-the-new-paradise-for-gay-parents-to-be

8. The Mercury News, “Fertility coverage protected for same-sex couples in California,” October 9, 2013, https://www.mercurynews.com/2013/10/09/fertility-coverage-protected-for-same-sex-couples-in-california/

9. BBC News, “The workplaces that will pay for surrogacy,” September 12, 2019, https://www.bbc.com/worklife/article/20190906-the-workplaces-that-will-pay-for-surrogacy

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode considers starting a family as a member of the LGBTQ+ community and was written by B|O|S Principal David Newson. That’s me.

Like many first-time parents who are over 30, my husband and I thought we had considered everything when we decided to bring a child into our family. And like most first-time parents, we underestimated all that was involved in starting a family, particularly as members of the LGBTQ+ community.

Luckily, we were both on the same page about wanting to have children — we each felt that having our own family was important. After attending a Men Having Babies conference, I understood that we were not getting any younger and needed to pursue a path to parenthood immediately. So, we began exploring different options.

I’m sharing this in the hope of imparting knowledge and some of our profound and tiny learnings along the way. Before I get started, know this: Your decision to become a parent is an incredibly personal decision, and at the end of the day, it’s none of anyone else’s business how you choose to start your family.

Adoption

For women and pre-op trans men with a female partner, one option is artificial insemination. But for two men, adoption is often the first choice for starting a family. It can be the easiest and least expensive option; for instance, fostering to adopt in California typically costs nothing to $500 through California Department of Social Services district offices. You will, however, be expected to pay for fingerprinting, medical exams, court filings, and CPR or other safety classes.1 Private adoptions in the U.S. can cost anywhere from $8,000–$40,000 while international adoptions can cost $30,000 or more.2 There are emotional and legal obstacles that can make adoption a difficult road for LGBTQ+ people, as many countries will not knowingly permit gay people to adopt.

Another option is Surrogacy

My husband and I felt it was important to have a genetic relationship with our child, and so we chose surrogacy. This route is very expensive and can be very emotional. For us, it was worth all the money and heartache.

If you choose surrogacy, as a gay couple, you should expect to spend about $250,000. A “simple” surrogacy with the fertilized egg of a male-female couple costs up to $130,000 in the United States.3 As a gay couple, you need to also factor in the costs of an egg donor, which can range from $12,000 to $20,000.4

We decided to go with an anonymous egg donor rather than ask a family member. This option is more expensive but also less complicated legally and emotionally since the egg donor does not have an interest in or a potentially perceived parental relationship with your child. In addition, there is the cost of in vitro fertilization, which is typically $1,500 to $3,000 for one cycle, which is a period from the time the eggs are retrieved to the time a fertilized egg is transferred to the uterus, and generally a few cycles are needed.5 And then there is the difficult reality that the first pregnancy might not make it full term; miscarriages are common and other complications may arise. This means you may need to go through the entire process more than once.

Here’s a key tip: You will want to talk to the hospital two months before your due date. Talk to nurses in the maternity unit and the hospital billing office. Ask about having your own room prior to and after the baby’s birth and negotiate the rate. Good surrogacy agencies have agreements that attempt to spell out costs at almost every intersection. However, as good as they are, other costs, sometimes large ones due to miscarriage or complications during pregnancy, unexpectedly appear.

When considering surrogacy, it is important to find the right agency and gestational carrier for you, and unless you have a friend or family member who is willing, you should brace yourself for a long wait. We waited more than eight months before we spoke to our first candidate. We also sought out and checked references for the agencies we were interested in working with. Trust but verify.

You also need to consider the geographical proximity of your surrogate. For instance, if you live in California and you want to be super involved during the pregnancy, then you might want to limit your surrogate search to California. If you are most interested in securing a surrogate as soon as possible, you might widen your search. Some states in the United States, such as Oregon, have larger pools of potential surrogates,6 and in 2019, Washington State reduced wait times from at least eight months to two to four months.7 An out-of-state surrogate, however, will increase your travel costs, including the expense of last-minute travel should the need arise.

Beyond the financial and legal considerations, we were struck by the pushback from straight people in our lives who encouraged us to adopt rather than use a gestational carrier. Our reply to them, if they had children, was usually, “This might be new to you, but if you’ll allow me to ask you, why didn’t you adopt?” Asking this question has helped create greater understanding for our decision and increased support from our extended community.

Insurance Considerations

As with any pregnancy and birth, there are insurance considerations. Bear in mind, most health insurance plans in most states do not cover fertility treatments for same-sex couples because most insurers cover infertility as it is medically defined — a man and a woman under age 35 unsuccessfully trying to conceive through unprotected sex for one year. However, some insurers have different parameters, so it is worth investigating the options.

For example, since 2013, health insurance plans in California must offer coverage for fertility treatments to homosexual couples and unmarried individuals. Under these plans, many fertility treatments are covered, including diagnostic tests, medication, surgery, and artificial insemination. However, in vitro fertilization is excluded.8 In terms of surrogacy, you are responsible for your surrogate’s insurance, copays, and all medical expenses not covered by insurance.

A September 2019 BBC article explores how expanded fertility benefits are a way companies are retaining talent, particularly LGBTQ+ employees. These benefits may cover the costs for egg and embryo freezing, semen analysis, adoption, and sometimes surrogacy.9

Life and Long-Term Disability Insurance

It may seem premature to think about life insurance before your child is born, but both life and long-term disability insurances are critical to building a family. Shortly after we got married and right after we signed the surrogacy contracts, we bought life insurance. That way, if something should happen to one of us, the surviving spouse could continue the process without worrying about financial constraints.

Both partners should have life insurance—not just the higher earner. This coverage will help defray costs of childcare and other “hidden” costs if something happens to a partner who may have chosen to stay at home or to reduce their workload to focus on raising the child. And, it is always a good idea to get the supplemental long-term disability insurance typically offered during an employer’s open enrollment period. You pay a little extra, but you get extra coverage that may prove critical if something happens to either you or your partner.

Estate Planning Considerations

If you are starting a family, you should plan your estate and review your insurance options. “Be proactive, not reactive,” notes my colleague Judith Gordon, an estate planning advisor here at B|O|S. “Talk to someone knowledgeable about parental rights, keeping all the potential tax and nontax consequences in mind.”

Before marriage equality was solidified into law in 2015, LGBTQ+ couples and individuals went to specialized lawyers to handle their estate planning, as it was more complicated. Now, however, if you are a married couple, your estate is handled the same as the estate of a heterosexual married couple. That said, lawyers familiar with LGBTQ+ community issues can be instrumental in addressing delicate matters, such as ensuring your money does not go to people or organizations that are not aligned with your values. If you know your beneficiary might use your money to support an anti-LGBTQ+ group, for instance, you could consider making a bequest instead.

Another partner here at B|O|S, Myles VanderWeele, offers this advice: If you have more than $150,000 in assets, you may consider creating a trust to avoid the expensive and lengthy probate process. In addition to creating a trust, make sure you have:

  • A will
  • An explicit healthcare directive for each partner
  • A durable financial power of attorney and
  • A designated guardian, or guardians, in the event something happens to both parents

You may even choose to have a letter outlining your wishes for your child’s chosen guardian or guardians.

Adopting After Birth

I return to the topic of adoption because you want to make sure both partners are regarded as the legal parents in all cases. Most estate planning documents have a reference to or definition of a descendant as anyone adopted before 18. Adopting, even if you and your partner are both on the birth certificate, provides additional peace of mind if your relationship, married or unmarried, should end or if anything should change in terms of LGTBQ+ rights at the federal level, such as Social Security benefits to dependents.

For us, even though we had a pre-birth judgment of parentage that allowed us to have both our names on the birth certificate, we opted to have the nongenetically related father formally adopt our child.

Update Your Estate Plans When Needed

Estate rules change all the time. Whether people are married or not, it is common to update estate plans on a periodic basis. Check in with your B|O|S wealth manager or estate planning attorney when a trigger happens, such as tax changes, changes in your relationship status, additions to the family, a child is born with special needs, or a guardian is to be changed, etc.

Last Words of Advice

Beware the illusion that all of this applied science is a simple equation that results in a live birth. The fact is it is an incredibly human journey complete with feelings of anxiety, uncertainty, failure, catastrophe, and pure joy. Miscarriages are common. Talk with people close to you; your support and allies are all around you. Talking about the lows, opens the door for understanding and connection.

Your relationship will be tested. I’ve learned more about myself through our journey than during any other period of my life. Going down this path has been difficult and disruptive to the life we had prior to our child’s birth, but it has also been incredibly magical. We are blessed to have our happy and healthy child, and we are considering adding another member to our family soon.

For important footnotes within the original article, ‘Planning for Parenthood: an LGBTQ+ Quick Guide’, please see the show notes.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

17.  B|O|S Flash Briefing: June 15, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

Show Notes:

1. German and French stock markets defined as the US dollar value of the MSCI Germany IMI index and the MSCI France IMI Index

2. Ben Carlson, “Is this the Most Volatile Year Ever?'”, June 12, 2020.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, June 17th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

The strong stock market rally that began in late March took a breather last week, the week of June 8th, with the S&P 500 dropping 4.8%, its worst week since the rally began. Most of the decline occurred on June 11th, the day after the Federal Reserve gave a somewhat disappointing economic forecast. The Federal Reserve gave their first economic projection since the crisis began, indicating they are not expecting a full economic recovery until 2022. The Fed also said they expect the Fed Funds rate to remain at close to zero for the next couple of years. This forecast dashed the hopes of those investors who had been expecting a ‘V’ shaped recovery. Another factor that contributed to the selloff in stocks was data showing a resurgence of COVID-19 cases in the United States. More than a dozen states reported a significant rise in the number of new cases. The number of new cases globally is also increasing as countries such as Brazil, India, and Russia have seen significant increases in new cases.

Technology stocks outperformed the market last week, building on their year-to-date gains. The NASDAQ Composite Index actually hit an all-time high on June 10th, the day before the selloff. On that day, Apple and Microsoft each surpassed a market valuation of more than $1.5 trillion. Prior to that day, no company had ever reached that valuation level. These two companies are the most valuable in the world. In fact, the combined value of these companies is approximately the same as the total value of the entire German and French stock markets combined.1

Foreign stocks also sold off last week, but by a slightly lower magnitude than the U.S. The World Bank released its economic forecast last week, projecting a global economic contraction of 5.2% for 2020 which would be one of the most severe declines in 150 years of data. The Bank also said that never before in history have so many countries entered a recession at the same time, including during the Great Depression and two world wars.

It is obviously impossible to predict whether the selloff last week was just a small correction of a continuing bull market or the beginning of a bigger move lower. One thing we do know is that this year is shaping up to be one of the most volatile on record. There have already been 26 days this year where the S&P 500 Index was up or down by 3% or more. In the previous seven years, there were only 8 days where the index moved by 3% or more. The 26 days in 2020 represent 23% of all trading days for the year. In comparison, during the financial crisis in 2008, only 17% of the days had a move of plus or minus 3% or greater. The granddaddy of them all for volatility, however, was 1932 during the Great Depression. 38% of trading days in 1932 were up or down 3% or more and an amazing 13% of days were up or down 5% or more.2

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions and the NASDAQ Composite Index, which is a market capitalization-weighted index of all domestic and international based on common stocks and similar securities stocks listed on the NASDAQ Stock Market. An index is unmanaged and not available for direct investment. Please see the show notes for important footnotes.

16.  B|O|S Flash Briefing: June 8, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, June 10th, 2020 and today’s flash briefing was written by B|O|S Director of Research Jeffrey Blanchard.

Stocks around the globe have continued to rally amid early signs of an improving global economy. As of closing on Monday, June 8th, the S&P 500 Index is now positive for the year, fully erasing the 34% decline in late February and March. Economic data releases in the U.S. and overseas have provided a tailwind for risky assets. Most notably, the U.S. jobs report for May that was released last Friday was much better-than-expected. Economist were expecting non-farm payrolls to decline by 7.5 million during the month. Instead, the report showed that payrolls grew by 2.5 million. Most of the job growth came from sectors that were hit particularly hard by the coronavirus such as restaurants and construction. Despite the positive surprise, the unemployment rate remained elevated at 13.3% and most economists are still expecting a long and slow recovery.

Foreign stocks had a particularly good week last week, rising significantly more than the S&P 500 Index. Part of the outperformance was driven by stocks in the Eurozone which were up over 10% last week. The European Central Bank announced an expansion of their bond buying program which brought their program approximately in line with similar programs by the U.S. Federal Reserve. U.S. stocks have been outperforming foreign stocks during the coronavirus crisis partially due to greater monetary stimulus in the U.S. The value of the U.S. Dollar has also been weakening lately which helps boost the relative returns of foreign assets. The U.S. Dollar Index has declined 4% since mid-May, which may not sound like much relative to stocks but is a sizable move in currency markets.

One of the many casualties of the coronavirus has been the Australian economy which previously had the longest running economic expansion among all developed countries. The Australian economy had experienced an incredible 28 consecutive years without a recession but expects to formally enter a recession once second quarter data is released. The country is a top producer of natural resources and has benefitted from exporting those resources to emerging countries, particularly China. The Australian economy has also been dependent on a growing tourism industry. As global industrial production declined and tourism froze, the country’s economy began to suffer. Economists are expecting the recession to be relatively short-lived but its length will ultimately be dependent on a return to normal in China which accounts for about 25% of Australian exports.

Oil markets received a lot of attention in April when futures prices on West Texas Intermediate crude dropped below zero. Prices have risen since and are now at about $38 per barrel. The price has risen recently due to the expected increase in demand as the U.S economy reopens. The rally continued last week after Saudi Arabia and Russia agreed to extend record cuts in output through July. Before you beat yourself up for not buying oil at zero, know that it is very difficult for an individual investor to participate in the oil markets and the liquid investments that are available to individual investors are imperfect. For example, the US Oil exchange-traded note, which is one of the largest oil funds for individual investors, is up about 28% from the day after oil traded below zero through June 5th. That is not a bad return but it is well below the return on the spot price of oil which is up about 280% during the same period.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

15.  Enhancing Your Legacy Planning With a Wealth Management Firm

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A technically well-drafted estate plan can only implement your wishes so far. Without someone watching over and coordinating a myriad of financial issues, many estate plans may be inefficient and difficult to implement. Financial advisors can help clients preserve their family wealth by working together to create strategies for transitioning the management and ownership of family businesses and communicating philanthropic goals and family values to future generations.

The following are some of the ways a financial advisor can help make your family legacy planning goals a reality.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode shares four ways a financial advisor can help make your family legacy planning goals a reality and was written by B|O|S Estate Planning Advisor, Judith Gordon.

As the estate planning advisor at B|O|S, I have the luxury and privilege of spending much of my time talking to clients about their family values and desires for legacy planning. From this vantage point, I see estate planning as so much more than a binder full of legal documents. Successful estate planning is a fluid process that is achieved with the collaborative effort of a team consisting of an estate planning attorney, accountant, and a financial advisor.

A technically well-drafted estate plan can only implement your wishes so far. Without someone watching over and coordinating a myriad of financial issues, many estate plans may be inefficient and difficult to implement. Financial advisors can help clients perpetuate family wealth by assisting clients protect themselves from financial abuse, promote succession of family businesses, communicate philanthropic intent, and find ways to pass family values down through the generations.

The following are four ways a financial advisor can help make your family legacy planning goals a reality:

#1 – Finding the Right Estate Planning Attorney and Preparing for Your Meeting

For some of us, finding the right estate planning attorney may seem like a daunting task. Your financial advisor knows how you like to communicate as well as your learning style. With knowledge of your personal and financial goals, your financial advisor may be better positioned to suggest appropriate estate planning attorneys who can advise and implement estate planning strategies from which your family could benefit.

In addition, your financial advisor can help you prepare the necessary information to share with the attorney so that your meetings are more productive and efficient and perhaps less costly.

After you meet with your estate planning attorney and receive draft documents, your financial advisor can be a second set of eyes and help you understand the strategies outlined in your documents and help ensure that your estate planning documents have been drafted in accordance with your wishes.

#2 – Collaborating With Your Attorney and Accountant

With higher gift and estate tax exemptions in place for the foreseeable future, nontax considerations will likely be the driving factor in prioritizing many people’s legacy goals. Many personal and business situations require thoughtful consideration when preparing an estate plan. These include challenges related to children who are financially unsophisticated, have creditor issues, or are involved in bad marriages; disabled or elderly family members; and business succession plans. Many of these sensitive issues can be reviewed and resolved with your financial advisory team so that you will be better able to describe your legacy goals to your attorney, get further input, and have the plan drafted appropriately to implement your desires.

Additionally, more advanced lifetime wealth transfer strategies such as grantor retained annuity trusts, qualified personal residence trusts, and irrevocable life insurance trusts will require your attorney, accountant, and financial advisor to collaborate to achieve the optimal result. As such, it is your financial advisor who is privy to much of the data needed by other professionals to maximize the benefits of customized estate planning strategies.

#3 – Ongoing Tax Minimization Strategies

Volatility in the markets is now part of daily life. It is more important than ever to optimize tax minimization strategies to increase portfolio performance — helping to ensure that you have assets to pass to the next generation. A carefully drafted estate plan may have less meaning if there are fewer assets available to distribute. Knowing the right strategies and the right time to implement the strategies is crucial to achieving your long-term legacy goals. Roth IRA conversions, tax-loss harvesting, and timing retirement distributions from inherited IRA accounts are all examples of ways a financial advisor can help minimize your annual income taxes and maximize your net worth.

#4 – Long-Term Support in Achieving Your Goals

Many clients view their estate plans as a “one and done” task. Once executed, the binder of documents is put in a drawer and rarely thought of for some time. However, an estate plan is intended to be modified as family and financial situations change — hence why revocable trusts are also known as living trusts.

Your annual meetings with your financial advisor can serve as a check-in on how your current financial and family situation may impact your estate plan. Changes in the nature and value of financial assets, sickness, death, marriage, children, and divorce are all situations that generally affect even the most carefully drafted estate plans. Having a safe space to discuss strategies that make sense for your current financial and family situation is the first step in figuring out whether an estate plan needs to be revised. Some changes, such as the title on an account or updates to beneficiary designations, can often be implemented without engaging the services of your estate planning attorney.

Determining how you want to live is as much a part of an estate plan as planning for what happens when you die. Your financial advisor can show you how gifts may impact your financial plan and can help make you feel more comfortable about transferring wealth and helping loved ones during your lifetime.

Finally, even with plenty of sound legal advice, an estate plan can be botched if proper follow-up is not implemented. Annual housekeeping tasks that are often required on lifetime wealth transfer strategies are all decisions that can be reviewed and monitored with a financial advisor.

Current events have put the most carefully drafted financial and estate plans to a test. The benefits of having the right financial advisor as a member of your team has never seemed more important. Knowing you have a trusted advisor who puts your interests first is yet another way of saying, “We are in this together.”

If you are interested in learning more about enhancing your legacy planning, please contact your B|O|S wealth management team to review your financial situation.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

14.  B|O|S Flash Briefing: June 1, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, June 3rd, 2020 and today’s flash briefing for the week of May 25th was written by B|O|S Director of Research Jeffrey Blanchard.

The rally in U.S. stocks has continued on optimism surrounding the gradual reopening of the U.S. economy and news of progress around potential vaccines for COVID-19. The S&P 500 Index is now trading above its 200-day moving average for the first time since late February and is now up approximately 35% from the low on March 23rd. The Technology sector continues to be a top performer since the rally began, however, there has recently been strength in previously underperforming sectors such as Financial and Industrial stocks which has provided a new tailwind for the market to move higher. The Health Care sector also got a boost after two companies, Merck and Novavax, announced some early progress on possible COVID-19 vaccines.

U.S economic data continues to be very weak, but some measures were showing some improvement. Last week’s report on continuing claims for jobless benefits remained high at 21 million, but were about 4 million claims lower than the previous week and lower than analysts were expecting. New Home Sales data were also a positive surprise as the report for April showed an increase in new home sales when analysts were expecting a sharp decrease. Historically low mortgage rates and a low supply of existing homes for sale has generally led to reasonably healthy sales activity during this crisis. Personal Spending was down about 14% in April which was the highest decline on record, while Personal Income rose about 11% and was also a record. The increase in Incomes was much higher than expected and was primarily caused by stimulus payments and historically generous unemployment benefits. Rising incomes and decreased spending led the savings rate to a record 33%. The record savings rate lends support to the expectation that spending should increase sharply as the economy begins to recover.

Foreign stocks have underperformed U.S. stocks for the year by about 10%. Earlier this year, as economies across the globe began to shut down, the U.S. and foreign indexes were falling by a similar amount as global investors looked to reduce equity risk around the globe. That all changed in late March after the Federal Reserve and the U.S. Congress initiated huge monetary and fiscal stimulus programs. These programs were larger in scope than many responses by other foreign authorities and increased the global demand for U.S. assets. In addition, U.S. stock indexes have greater exposure to technology companies which are expected to be more resilient during the current recession. Technology companies represent about 25% of the S&P 500 Index, but are only about 10% of comparable foreign stock indexes.

Municipal bonds have shown some relative strength recently in the bond market. The Barclays Municipal Bond Index was up 3.2% during the month of May which was significantly better performance than most other bond sectors during the month. Municipals had previously been underperforming due to concerns about growing budget deficits and debates in Congress that displayed a hesitancy to offer additional federal help. Despite the outperformance in May, municipals are still underperforming U.S. Treasuries for the year on both a nominal and tax-equivalent basis.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. We also referenced the Bloomberg Barclays Municipal Bond Index, which covers the United States Dollar-denominated long-term tax exempt bond market that includes state and local general obligation bonds, revenue bonds, insured and prerefunded bonds. An index is unmanaged and not available for direct investment.

13.  Protecting Yourself From Financial Fraud in the Time of COVID-19

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While some of the fraud attempts are uniquely of the COVID-19 making, such as scammers using stolen personal information to claim fiscal stimulus checks and unemployment benefits on behalf of unsuspecting Americans, many of the scams are variations of the most common types of fraud that are already out there, just with a coronavirus twist. Scammers aren’t necessarily following a new playbook, but they are exploiting the fact that fear and uncertainty make for a larger pool of vulnerable victims.

Show Notes:

1. Paul Witt, “COVID-19 scam reports, by the numbers,” Federal Trade Commission, April 15, 2020, https://www.consumer.ftc.gov/blog/2020/04/covid-19-scam-reports-numbers

2. Danny Palmer, “Ransomware is now the biggest online menace you need to worry about – here’s why,” ZDNet, April 22, 2020, https://www.zdnet.com/article/ransomware-is-now-the-biggest-online-menace-you-need-to-worry-about/

Additional Sources of Information:

Federal Trade Commission: Consumer information and best practices to stay safe online. https://www.consumer.ftc.gov/topics/online-security

Federal Trade Commission: Scam alerts and information on current scams and fraud reports. https://www.consumer.ftc.gov/features/scam-alerts

World Health Organization (WHO): Cybersecurity and how to prevent phishing. https://www.who.int/about/communications/cyber-security

Cybersecurity and Infrastructure Security Agency (CISA): Defending against COVID-19 cyber scams. https://www.us-cert.gov/ncas/current-activity/2020/03/06/defending-against-covid-19-cyber-scams

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode is about steps to take to protect yourself from financial fraud during COVID-19 and was written by B|O|S Wealth Manager, Emily Taken-Vertz.

As the novel coronavirus has spread across the world, it has ushered in a global health pandemic and an unimaginable tragic loss of human life. All the while, another insidious and deceptive threat has been proliferating at a rapid pace: financial fraud.

True to form, hackers and thieves routinely view crises and times of great fear and uncertainty as opportunities to ramp up their efforts. This time of COVID-19 is no different. Fraudsters have worked with remarkable speed, scope, and efficiency in the rush to capitalize on this crisis. Since the beginning of the year, the Federal Trade Commission, whose mission is to protect America’s consumers, has received over 18,000 COVID-19-related fraud reports, claiming losses of nearly 13.5 million dollars. In the first few weeks of April, the FTC received about four times as many complaints regarding identity fraud as it had in the previous three months combined.1 Just as the true scope of the virus infection rate has been hard to assess due to lack of widespread testing, many experts believe that actual fraud victims far outstrip those that report.

While some of the fraud attempts are uniquely of the COVID-19 making, such as scammers using stolen personal information to claim fiscal stimulus checks and unemployment benefits on behalf of unsuspecting Americans, many of the scams are variations of the most common types of fraud that are already out there, just with a coronavirus twist. Scammers aren’t necessarily following a new playbook, but they are exploiting the fact that fear and uncertainty make for a larger pool of vulnerable victims.

Almost all cybersecurity and fraud experts believe that increased education and awareness among the public is the single most important weapon in stopping cyber-fraud in its tracks. This means knowing what to look for and following some best practices to keep yourself safe. Typically, fraudsters aren’t exactly the stick-to-it type. It’s a numbers game for them, so if they aren’t able to lure you into a scam after a first attempt, they’ll likely move on to their next target.

So, what can you do to protect yourself? Here are a few best practices to keep in mind.

#1 – Regard any unexpected email with an almost universally suspicious approach, even if the email came from a friend, relative, or colleague.

Do not click on any unrecognized links or open any unfamiliar attachments. With our ever-increasing reliance on technology and email, phishing and malware have emerged as the most pervasive forms of cyber-fraud, now more common than credit card payment information theft.2 These types of attacks will typically come in the form of an email soliciting potential victims to disclose personal information or click on a malicious link that may then install malware on the individual’s computer or network and/or direct them to a fraudulent site. Many hackers spoof domain names so they look familiar at first glance, but in reality, they may have one inconspicuous difference, such as a missing letter.

If something seems off or not quite right, trust your instincts. Close the email immediately, delete it, and if it came from someone you know, check in with that person to alert them that their email may have been hacked.

#2 – Be especially aware of emails, though this applies to calls and texts too, that heighten your level of fear or urgency.

The novel coronavirus is just the calamity of the hour. Scammers often tailor their schemes around a current crisis and/or seasonal event, like a holiday or tax season. It’s much easier to miss a red flag or click without thinking when emotions are heightened.

As extreme as it sounds, it’s probably advisable to be suspicious of any unsolicited email you receive offering information on COVID-19, including useful statistical information on infection rates, treatments, or new cleaning products that promise to mitigate the threat of the virus. If you’re looking for helpful information to stay informed, it’s always best to navigate directly to a website from your browser instead of clicking on a link.

The inverse of drumming-up fear holds true as well. Fraudsters may play to people’s heartstrings with all manner of emotional human-interest stories and solicitations for charitable donations. Always verify any charitable organization’s authenticity before making a donation and never donate in cash, with a debit card, or via wire. Credit cards and checks are generally safer.

#3 – Adhere to strong password principles.

The world’s most common password is still “123456,” and the notorious data breach of Equifax in 2017 that exposed the personal information of more than 147 million Americans was a result of scammers cracking the unbelievably sophisticated password of “admin.” As tempting as it might be for ease of use, do not duplicate passwords across accounts. Password managers can help store more complex and unique passwords, so you don’t have to remember them by heart.

#4 – Enable multifactor authentication for all logins.

This type of authentication requires two or more pieces of information from a user to prove their identity — typically a password and another factor. Common types of multifactor authentication include SMS-based verification via text, email-based verification, and two-step, push-based verification, which is used widely by both Google and Apple across their suite of products. Two-factor authentication, also known as 2FA, which is a subset of multifactor authentication, may also use two different “knowledge” factors, which are things a user knows, like a password and a “secret question” answer to verify the user’s identity. Many times, multifactor authentication is disabled by default, so you may need to alter your security settings to opt in.

#5 – Make sure your operating system, browser, and antivirus and anti-malware software have the latest software updates.

If possible, allow for automatic updates to ensure you always have the most recent version. Companies are continually adding new and enhanced security to their products to keep up with the speed in which hackers evolve.

#6 – Be vigilant of the next frontier.

While phishing and malware are the top cyber scams de jour, hackers are now increasingly targeting us on our mobile devices as they become more and more central to our lives. Not only do our phones feature prominently in current authentication methods, the “Internet of Things” has rendered our phones the command centers for everything from household appliances, security alarm systems, thermostats, and even our cars. Making sure you bring as much awareness to your mobile activity that you do when using your other devices is essential in this increasingly mobile world.

I’m David Newson and you’ve been listening to B|O|S Perspectives podcast. If you enjoyed today’s episode please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

For important footnotes within the original article, ‘Protecting Yourself From Financial Fraud in the Time of COVID-19, please see the show notes for this podcast.

12.  Inflation: The Dog That Hasn’t Barked

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In a crisis, desperate times often call for desperate measures. As acknowledgment to lessons learned from the Great Depression of the 1930s, federal institutions have embraced economic and monetary stimuli, low interest rates, and free(ish) trade policies to keep the economic wheels turning. But the price tag has been hefty. In a matter of weeks, trillions of dollars were printed — some physically, most electronically — which is on the heels of $4+ trillion created during the 2008–2009 financial crisis just a decade ago. With so many more U.S. dollars in circulation, should investors worry about inflation — a decline in the value of money?

Show Notes:

References:

Gabe Alpert, “Government Stimulus Efforts to Fight the COVID-19 Crisis,” Investopedia, April 14, 2020,https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode addresses the question: with so many U.S. dollars in circulation, should investors worry about inflation – a decline in the value of money? and was written by B|O|S Principal, Aaron Waxman.

The Paycheck Protection Program, the Money Market Mutual Fund Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Main Street Lending Program, the Municipal Liquidity Facility, the Commercial Paper Funding Facility, and the Primary Dealer Credit Facility. Collectively, these programs represent about $6 trillion of new money created through joint efforts between the U.S. Treasury and U.S. Federal Reserve to help mitigate the economic and market implications of COVID-19.

In a crisis, desperate times often call for desperate measures. As acknowledgment to lessons learned from the Great Depression of the 1930s, federal institutions have embraced economic and monetary stimuli, low interest rates, and free(ish) trade policies to keep the economic wheels turning. But the price tag has been hefty. In a matter of weeks, trillions of dollars were printed — some physically, most electronically — which is on the heels of $4+ trillion created during the 2008–2009 financial crisis just a decade ago. With so many more U.S. dollars in circulation, should investors worry about inflation — a decline in the value of money?

In the short run, probably not. Mass isolation, quarantine, and unemployment severely cripple spending because incomes fall and activities are restricted. Showering the economy with freshly minted money doesn’t incrementally add to pre-crisis levels of spending, it only partially offsets the decline in total spending as a result of the crisis. Checks in the mail from Uncle Sam help pay for groceries and rent, not new furniture in the living room. Clothing, cars, and airline tickets go on sale because demand falls faster than supply. Trillions of dollars are infused into the economic ecosystem and the price of crude oil still falls 60 plus percent. Each U.S. dollar on hand buys as much or more than it did pre-crisis, not less.

Over the long run, though, investors would be wise to keep a close eye on inflation. The world’s governments have printed an incredible amount of fiat currency and created enormous sums of debt in a very short period of time. The charts in the show notes illustrate total worldwide debt and that debt within major countries, measured as a percentage of gross domestic product since the turn of the century. Notably, the charts only include data through 2019. The impact of COVID-19 on the debt trajectory is yet to come — and it will surely be significant.

Looking to the bond market for clues, we are plainly led to believe that there is little inflation in sight. The 10-year breakeven inflation rate, represented by the yield on a 10-year U.S. Treasury bond with no inflation protection as compared to the yield on a 10-year U.S. Treasury bond that adjusts for the rate of inflation in the U.S. economy, that is a so-called Treasury inflation-protected security, currently hovers around 1%. In short, bond investors are collectively betting that inflation will average 1% per year over the next decade.

We will only know, of course, after the virus has passed and economic activity returns to some new normal. The proverbial canary in the coal mine may be the debt-to-GDP ratio. If the economy is able to bounce back and expand faster than new debt is created, the global heap of debt may be manageable as total debt as a percentage of GDP declines. However, if debt growth continues to rapidly outpace GDP growth in a lasting fight against economic malaise, at some point, investors may begin to question the credit worthiness of major issuers and demand higher interest rates as compensation for higher perceived risks of repayment. To fight against such a dynamic, the Fed, as it is doing now, may print more and more money to buy more and more debt to keep interest rates down, creating a loop in which fewer bankruptcies and higher employment in the short run, via low interest rates, leads to too much money creation — thus spiking inflation.

The Fed and central banks around the world are attuned to this risk, of course; and on balance, we should have some level of confidence that they will collectively navigate things successfully. Having said that, the stakes are enormous and we are sailing in uncharted waters. Mistakes can happen, which may justify portfolio modifications to help hedge against the higher inflation, a risk the broader market doesn’t seem to expect.

Effective hedges may be value stocks, gold, real estate investment trusts, and Treasury inflation-protected bond securities that pay an interest, or “coupon”, rate equal to Consumer Price Index. Value stocks tend to fare better than growth company stocks because they are typically defined as companies with low price-to-book ratios. The “book” in the denominator represents book value, or assets on the company’s balance sheet, which tend to move up and down in value in a manner commensurate with local inflation. Real estate investment trusts work the same way as the underlying trust assets are physical properties. Gold is a more obvious inflation hedge, but it can also be a more expensive one, as gold has no yield or profit stream. There are, of course, other potential hedges beyond these examples.

As ever, long-term investors should maintain a balanced, diversified approach with at least some embedded defenses to help navigate all weather in all seasons. When markets mold around a consensus view, surprises can be costly.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

11.  Hope Springs Eternal

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In light of the pandemic, no one is embracing the stock market’s daily gyrations with particular confidence. Nevertheless, the seemingly surprising gains during the month of April, in which the U.S. stock market, as measured by the S&P 500, rose by more than 12%, provided some reassurance to investors. Yes, with 33 million Americans out of work, entirely at odds with the radically more optimistic expectations of just a few months prior, the stock market turned in its best month since 1987.1 The market is still down by modest double digit amounts for the year, but as of this writing losses in the U.S. were closer to 10% than the ~30% range investors were absorbing little more than 6 weeks ago.

Show notes:

 

1. MarketWatch, May 4, 2020. https://www.marketwatch.com/story/the-stock-markets-rallying-while-the-economys-tanking-it-all-makes-perfect-sense-2020-05-02

2. Wall Street Journal, April Jobs Report, May 3, 2020. https://www.wsj.com/articles/april-jobs-report-likely-to-show-highest-unemployment-rate-on-record-11588514401

3. IRS website. https://www.irs.gov/statistics/soi-tax-stats-irs-data-book

4. Jeffrey Gundlach, Twitter, May 4, 2020. https://twitter.com/TruthGundlach/status/1257487779958648834

5. Markets Insider, May 4, 2020. https://markets.businessinsider.com/news/stocks/disposable-income-likely-grow-amid-virus-shutdown-goldman-sachs-forecast-2020-5-1029162249

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode examines the various steps the Federal Reserve and Congress have been taking to address COVID-19’s effect on the markets and US economy. Today’s episode was written by B|O|S Principal Jeff Lancaster.

In light of the pandemic, no one is embracing the stock market’s daily gyrations with particular confidence. Nevertheless, the seemingly surprising gains during the month of April, in which the U.S. stock market, as measured by the S&P 500, rose by more than 12%, provided some reassurance to investors. Yes, with 33 million Americans out of work, entirely at odds with the radically more optimistic expectations of just a few months prior, the stock market turned in its best month since 1987.1 The market is still down by modest double-digit amounts for the year, but as of this recording, losses in the U.S. were closer to 10% than the ~30% range investors were absorbing little more than six weeks ago.

A good part of the gain was linked to increasing confidence about the ability to flatten the curve of COVID-19 in the short run, yet plenty of fuel remained for those investors still inclined to fear the worst. To pick a single example, expectations about future corporate profits grew ever more pessimistic, as illustrated in the chart contained in the show notes.

Given the dismal news on the front page of every last newspaper, staying in the stock market in late March and throughout April took tremendous discipline and fortitude. April’s excellent returns bring to mind the aphorism, attributed to many, that a good part of successful long-term investing requires one to “don’t just do something, stand there.”

A 12-Month Perspective

Investors often cherry-pick the worst possible time period to measure portfolio losses, but for those of a more optimistic bent, it is useful to note that from the end of April 2019 to the end of April 2020 the S&P 500 actually recorded a slightly positive return. This seems so incongruous as to beggar belief. Given that the U.S. unemployment rate as recently as February was at a half-century low of 3.5% yet is now said to be above 20%,2 what supports the stock prices of so many, but certainly not all, of the companies with suddenly unemployed workers? As of this recording, things change quickly, the recovery in stock prices seems to be traceable to three major factors: increasing confidence that growth in COVID-19 cases can be mitigated, awareness that the Federal Reserve will do whatever it believes necessary to secure the financial system, and, finally, congressional authorization of trillions of dollars for businesses and workers alongside clear signals that if these trillions aren’t enough, there’s more where that came from.

We will leave the virus-related epidemiology aside and consider the steps taken by the Fed and the Congress.

The Fed is frustrating because while everyone knows it is awesomely powerful, few sensible, educated people really understand its workings. The metaphysical complexity has arguably worsened in the past few months, as there are now no fewer than nine lending programs in place, each one, seemingly, with its own mysterious acronym. Some of these programs are new creations while others are older projects recently expanded, but in any case, these facilities provide an aggregate $2.3 trillion in loans. Some of this money is and will be doled out in partnership with the U.S. Treasury. The historically novel and broader Fed goal is to insulate not only businesses and their balance sheets but also to extend credit to state and local governments.

In addition, the Fed lowered the cost of borrowing by dropping interest rates close to zero. Importantly, the Fed has made it crystal clear that rates will stay very close to zero until after the economy recovers and robust employment is restored.

Last but not least, the Fed has created money out of thin air and has used that money to purchase securities issued by the Department of the Treasury to finance deficit spending. Between March 16 and April 16, the Fed bought nearly $80 billion of securities a day. Other Fed funds will be used to buy debts issued by corporate and municipal borrowers. All told, the Fed’s balance sheet, the bonds owned by the central bank, may soon total $11 trillion, roughly twice the size of the Fed’s balance sheet during the 2007-2009 financial crisis.

The Fed’s aggressive moves have been largely cheered but some details have been the subject of controversy. In particular, the Fed’s intention to create an affiliated entity to backstop the market for publicly traded junk debt has raised eyebrows. Junk is just one step above equity on a business’s capital structure, and if the Fed has said it will buy junk, some wonder if it will go the route of the Central Bank of Japan and start buying stocks should market conditions once again deteriorate. In any case, just as owners of debt securities are reassured to know that the Fed is buying what they own, all else being equal, owners of stocks might well be cheered to know that the Fed might step in to support prices of what they own, too.

Congress has been busy, too, spending money at unprecedented rates via no less than four economic stimulus packages since March. The most notable features of these packages include unemployment benefits, expanded lending to small businesses, and stimulus checks sent directly to American households. As recently as January of this year, the Congressional Budget Office forecast a $1 trillion deficit, but the federal deficit this year is now projected to be $3.7 trillion and the actual figure will likely prove higher than $4 trillion. To get a sense as to how large a $4 trillion deficit is, consider that in fiscal year 2018 the IRS collected $3.5 tillion in gross taxes.3 This equation prompted influential bond manager Jeffrey Gundlach to ask on his Twitter feed, “If endless borrowing is a viable solution, why did we have any taxation in the first place?”4 Less cynically, Goldman Sachs economist Jan Hatzius measures the fiscal response as so lavish that Americans’ “disposable personal income is likely to register slightly positive growth for this year.”5

In the Balance

Slowing infection rates, an aggressive and inventive Fed, and a free-spending Congress all worked together in April to push U.S. stock prices significantly higher. As ever, stock prices reflect the equilibrium judgments of highly informed market participants, and so we can imagine that for every dollar thinking these same forces will continue to propel the market higher, another dollar is wagered in the belief, commonly heard, that the market needs to fall further to more accurately reflect diminished expectations for future corporate profits. With uncertainty high on many fronts though, it is reasonable to assume that the equilibrium judgments of investors will continue to fluctuate substantially as new developments in the battle with the coronavirus and new updates on the economy provide additional insights into what the future will look like.

If you enjoyed today’s episode please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

10.  B|O|S Flash Briefing: May 18, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 20th, 2020 and today’s flash briefing for the week of May 11th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks rallied sharply on Monday, May 18th, propelled by news of positive results from an early-stage trial of a potential COVID-19 vaccine. A U.S. company named Moderna Inc. announced that an experimental vaccine induced immune responses in healthy humans. This is an early milestone in a long road to a potential vaccine, but gave the market confidence that a vaccine would be forthcoming at some point in the future. The S&P 500 Index rallied approximately 3% on the news wiping out the losses from last week, which was the worst performing week since the market lows in late March.

Most of the losses from last week occurred on Tuesday and Wednesday. Dr. Anthony Fauci testified before a Senate Committee on Tuesday and said the virus is not under control and warned that reopening the country too soon could have serious consequences. Stocks fell further on Wednesday after Jerome Powell, the Chairman of the Federal Reserve, spoke at a virtual conference. During that meeting Mr. Powell said the Fed was unlikely to lower the Fed Funds rate below zero. He also implied that more support needs to come from government spending and not monetary policy. The market responded negatively to these comments as the markets had been pricing in the possibility of negative rates by early next year. The comments were also perceived to mean that the Fed was not prepared to provide additional support in the near term. Powell’s comments on increasing fiscal stimulus also increased bearish sentiment since the House of Representatives and the Senate have not been able to come to an agreement on the details of an additional stimulus package.

Economic data released last week continues to be historically bad, but results were generally in line with analyst’s expectations. The Consumer Price Index release showed prices fell by 0.8% in the month of April which was the largest monthly drop since the financial crisis of 2008-2009. The report on U.S. Retail Sales for April showed retail sales falling by 16% compared to sales in March. The decline in April was the largest monthly decline on record. For some context, the worst monthly decline in retail sales during the financial crisis was 3.9%.

The price of oil has risen sharply higher over the last few weeks as demand is expected to increase as the global economy restarts. Significant cuts to production by the U.S., OPEC, and Russia have also led to higher prices. The current price of the near-term futures contract for West Texas Intermediate Crude is about $32 per barrel which is quite an improvement from late April when prices briefly dropped below zero. Prices fell below zero because the U.S. was running out of storage capacity, forcing holders of oil futures contracts to pay buyers in order to close out their positions to avoid taking delivery of the oil. The negative price of oil was a short-term anomaly that only lasted one day and was exacerbated by market dynamics on the expiration date of the May futures contract.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

9.  B|O|S Flash Briefing: May 11, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 13th, 2020 and today’s flash briefing for the week of May 4th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks rose for the week ending May 8th despite the release of a historically bad U.S. jobs report released on Friday. The jobs report for the month of April showed a loss of 20.5 million jobs and an unemployment rate of 14.7%. The job losses in April were the highest one-month loss on record and were twice as large as the total number of jobs lost during the entire financial crisis. The leisure and hospitality sector of the economy has been particularly hard hit with employment falling 45% since February. Despite these horrible numbers, the market took solace in the fact that the household survey showed that 18 million job losses were classified as temporary layoffs. Some portion of those temporary losses may become permanent job losses over time but for the time being, investors were encouraged by the high number of temporary layoffs and the concurrent easing of stay-in-place orders across the country.

The first high-profile bankruptcies by large retail chains due to the coronavirus were announced last week as J. Crew and Neiman Marcus both filed for relief. JC Penney has also missed an interest payment but has yet to file for bankruptcy. Defaults on the debt of retailers have now reached an all-time high according to Fitch Ratings. Despite this news, stocks of companies in the retail sector overall have performed well since the lows in late March. The S&P 500 Retailing Industry Index has risen about 33% since March 23rd, which is slightly higher than the return of the S&P 500 Index over the same time period. Troubles for traditional retailers have existed for some time as consumers have embraced online shopping. This has led to a decline in the representative weights of traditional retailers in various stock market indexes which means their most recent stock price declines have had a smaller impact on the overall stock market than would have been the case years ago.

The recent trouble with traditional retailers has raised some concern from investors about the performance of real estate investment trusts, or REITs as they are commonly called. Although there are publicly-traded REITs that invest solely in shopping malls and other forms of retail real estate, these retail-oriented REITs represent only about 8% of the publicly-traded REIT market. Investors who get their REIT exposure through diversified mutual funds or ETFs that track a REIT index have much more exposure to specialty REITS and residential REITs. Specialty REITS are by far the largest sector in the publicly-traded REIT market. The specialty REIT sector includes publicly-traded trusts with diverse businesses such as cell tower leases, storage facilities and data centers. REIT indexes have underperformed the S&P 500 Index for the year but have performed in line with the broader index since the stock market low in late March.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. We also referenced the S&P 500 Retailing Industry Index, which is a market capitalization-weighted index of companies in the S&P 500 that are classified in the retailing industry according to the Global Industry Standard Classification (GICS) system. An index is unmanaged and not available for direct investment.

8.  B|O|S Flash Briefing: May 4, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 6th, 2020 and today’s flash briefing for the week of April 27th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks, as measured by the S&P 500 Index, were relatively flat the week of April 27th as optimism around the reopening of some businesses across the country was offset by worse-than expected earnings reports and rising conflict with China later in the week. Despite the flat performance during the week, the index had its best month since 1987. The S&P 500 Index rose 12.8% in April, largely offsetting its decline in March. Stocks of small companies outperformed the stocks of large companies for both last week and the month as a slowly reopening economy is expected to benefit smaller companies to a greater extent. Stocks of foreign companies outperformed the U.S. last week but underperformed during the month of April.

The Hated Rally

Recent data from the American Association of Individual Investors shows that 44% of their members expect stocks to be lower over the next six months. This level of bearish sentiment is significantly higher than the historical average of about 31%. There is no question that many believe the recent rally makes no sense and fully expect prices to decline as the economic impacts from COVID-19 are fully felt. In general terms, a rally off the lows makes sense when you consider the unprecedented amount of fiscal and monetary stimulus that has been injected into the economy since the market hit the low in late March. No one knows where prices will be later this year, but the market has already priced in bleak expectations for economic data in the second quarter – more on that later. Where prices end up later this year will partially depend on the actual results versus the expectations, which no one can predict with any certainty. That is why we believe the focus should be on your long-term goals instead of a prediction of what may happen over the next few quarters.

U.S. GDP Growth, or a Lack Thereof

The first estimate of first quarter U.S. GDP was announced last week on April 29th. The data showed the economy contracting by 4.8% on an annualized basis after adjusting for inflation. This was the worst quarterly contraction since 2009 and was below the consensus expectation of -4.0%, per Bloomberg. Most of the decline was due to a drop in consumer spending of 7.6%. Ironically, reduced spending on healthcare had a large impact as most people avoided doctors and hospitals if they could and non-essential heath care procedures declined sharply. It is important to note that most stay-in-place orders across the country occurred in mid-March, so the negative impact of the last two weeks of the quarter overshadowed the majority of the quarter when the economy was operating normally. The consensus estimate for second quarter U.S. GDP is a decline of 27.5% with a sharp rebound beginning in the third quarter. That said, the range of expectations is much wider than usual given the unpredictability of the situation.

First Quarter Earnings Update

As of May 1st, 55% of the companies in the S&P 500 Index have announced first quarter earnings. Earnings for the companies in the index are on pace to decline by 13.7% versus the first quarter of 2019. If the decline in earnings holds it will be the largest decline since the financial crisis and is significantly below the expected decline of 6.9%. Given the uncertainties going forward, many companies have withdrawn previously released forward guidance and/or elected not to provide any guidance going forward. Analysts are currently expecting negative earnings growth of 36.7% in the second quarter. All earnings data per Factset.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

 

7.  The Death of a Loved One: What Do I Do Now?

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“What do I do now?” is often the first question asked when a parent, spouse, child, or a close friend or relative passes away. My best advice is when that time does come, close your eyes, breathe, and take the time you need for your memories. Stay in touch with your own feelings and well-being. Few people can think with total clarity on all fronts when a loved one dies and it is easy to become distracted and endanger yourself or others (falls or other accidents can occur).

The list of important documents to locate may be found at: https://www.bosinvest.com/blog/estate-planning/the-death-of-a-loved-one-what-do-i-do-now/

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Monday, April 27th, 2020 and today’s episode is about steps to take after the death of a loved one and was written by B|O|S Estate Planning Advisor, Judith Gordon.

“What do I do now?” is often the first question asked when a parent, spouse, child, or a close friend or relative passes away. My best advice is when that time does come, close your eyes, breathe, and take the time you need for your memories. Stay in touch with your own feelings and well-being. Few people can think with total clarity on all fronts when a loved one dies and it is easy to become distracted and endanger yourself or others. As an example, falls or other accidents can occur.

Other than immediate tasks involving the body of the deceased and pending transactions such as a real estate closing or other financial emergency, most tasks related to someone’s death do not require immediate action. However, for some, focusing on putting a decedent’s affairs in order can provide an opportunity to think about other things and the work may provide emotional relief. For others, focusing on an estate administration can wait until one is emotionally ready to tackle the tasks.

The following information is a checklist of many of the tasks that need to be handled after a person passes away. Ultimately, what needs to be done and how long it will take to deal with each task depends on an individual’s situation. The information set forth below is not a substitute for sound professional advice.

#1. Call 911, family members, and a funeral director

If there is an unexpected death at home, call 911. If the deceased was under hospice care, notify hospice.

Contact immediate family to comfort one another and share information about important decisions. You may encourage them to spread the word so you have more time to attend to other matters.

Look for any written instructions for funeral or memorial services and burial or cremation arrangements. Many people name a designated agent in an Advance Health Care Directive to take care of these arrangements.

Also, look for any records of the deceased person’s desire to donate organs. Two sources to check are the decedent’s driver’s license and their advance health care directive.

Contact a funeral director. An experienced funeral director can help with a variety of services beyond the obvious ones, including making transportation arrangements (if the death was in another city), cremation, notifying government agencies, obituaries, and ordering death certificates.

#2. Secure property

Lock up the person’s home and vehicle and make sure their car is parked in a secure and legal area. If the home will be empty, you may wish to notify a neighbor or the police. If there are pets, arrange for someone to care for the animal until a permanent arrangement can be made.

#3. Funeral or memorial services

Enlist help for the important decisions if needed. Arrange for someone to remain at the decedent’s home during the funeral service. Sadly, many people have come home to find that the deceased home has been robbed while everyone was attending the funeral.

Prepare an obituary and arrange for publication in appropriate newspapers or online. If the deceased left an ethical will or letters written to family members, not legal documents, then share as appropriate.

Notify the post office and provide a forwarding address for mail so that accumulated mail does not draw attention. Mail may also be a source of useful information. Cancel newspaper subscriptions so papers do not stack up.

#4. Ordering Death Certificates

The funeral director or hospice can assist with ordering death certificates. It is usually unclear how many certified death certificates will be needed but 10 to 12 will generally suffice. A copy of a certified death certificate can often be used to accomplish some tasks. If needed, you can always order additional certified copies from the county clerk’s office.

#5. Collect and secure pertinent documents and inspect safe deposit box

Inspect the decedent’s safe deposit box for important documents and valuables. The rules regarding access to a decedent’s safe deposit box can be tricky and may vary from institution to institution. If there is a possibility of disputes among family members, it may be wise to have a bank personnel or disinterested third party present when the box is opened. A written inventory should be prepared at that time to document the contents of the box.

Some important documents to locate are:

Original will and any codicils.
Copies of bank account statements for month including date of death.
Copies of brokerage account statements for month including date of death.
Copies of any securities or stock options that are not included in the brokerage statements.
Copies of any promissory notes receivable and the balance due at date of death.
Copy of the deed to the residence and the deeds to any other real property owned.
Ownership certificates for any automobiles.
Copies of IRA and 401(k) account statements for month including date of death.
Life insurance policies on the decedent’s life or on the surviving spouse’s life.
List of any other assets of any type owned.
Copies of any trusts of which the decedent was a beneficiary.
List of payments made for household bills, etc. for the two months after death.
Mortgage statements for month including date of death.
Real property tax bill for the current tax year.
Names, addresses, and dates of birth of the decedent’s children.
Social security numbers for the surviving spouse and children.
Location of any safe deposit box.
Copies of income tax returns for the last two years.

#6. Consult a lawyer even if you do not engage their services

If at all possible, contact the attorney who prepared the decedent’s will or trust to make certain that you have copies of any documents the attorney had in his or her files. Advice from a qualified professional can often save estate money, make the process of settling the estate easier, and help family members avoid potential liabilities. Even if matters appear straight forward, there are tasks that are required that may not be apparent.

For example, Probate Code Section 8200(a) requires that the person in possession of the will lodge the will with the clerk of the superior court in the county in which the decedent resided within 30 days of learning of the death unless a petition for probate has already been filed. The will must be lodged even if there is not going to be a probate because the decedent had a fully funded trust.

If the decedent had a trust, a Notification By Trustee must be sent to heirs and beneficiaries notifying them of the death and their right to receive a copy of the trust.

You will also want to consider retaining the services of an accountant. There will be final income tax returns to prepare, post-death fiduciary income tax returns, and, depending on the size of the estate and personal circumstances, an estate tax return may also need to be prepared.

#7. Notify government agencies and insurance companies

Typically the funeral director notifies Social Security that a person has died but it is always a good idea to double check. If benefits are being received, overpayments can be complicated. If a payment was received for the month of death, the payment may need to be returned. If the deceased has a surviving spouse or dependents, you will want to inquire about changes to benefits.

If Medicare benefits are involved, Social Security will inform Medicare.

Notify the health insurance company or the deceased’s employer to discontinue coverage.

Terminate other types of insurance, such as automobile or umbrella policies if appropriate and obtain appropriate refund of premiums paid.

#8. Apply for death benefits

It is not much but Social Security provides a surviving spouse a one-time $255 death benefit. Social Security can also put the deceased person on the Social Security Master Death Index to prevent fraudsters from collecting a dead person’s Social Security payments.

Determine the beneficiaries of retirement accounts and take time to understand the best methods to take distributions from these accounts. There are different income tax implications so a thoughtful analysis is important.

Locate any life insurance policies and complete the necessary forms. Each insurance company will have their own requirements for payment of death benefits.

#9. Cancel accounts, memberships, and subscriptions

It may take some detective work but following someone’s death, cancel subscriptions, memberships, or other services that will no longer be used.

#10. Pay recurring bills and terminate automatic payments

Pay regularly recurring bills such as car payments and utility bills. Terminate automatic payments as soon as possible and have paper bills mailed to an appropriate address. As a person’s house is closed down, utilities can be cancelled.

#11. Deal with digital assets

Locate the decedent’s passwords and digital data on computers, tablets, and smart phones and deal with each as appropriate. Digital data will include photos, videos, music, emails, and social media accounts.

Please feel free to contact your B|O|S wealth management team for further assistance in helping you with your loved one’s estate administration.

6.  When the Waiting Isn’t the Hardest Part

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College expenses can be the second largest cost incurred by most families, after the purchase of a home. Since the financial crisis of 2008, states have reduced funding for public universities, requiring students and families to shoulder more of the costs.

Show Notes:

1. Center on Budget and Policy Priorities (CBPP), “State Higher Education Funding Cuts Have Pushed Costs to Students, Worsened Inequality”, October 24, 2019. https://www.cbpp.org/research/state-budget-and-tax/state-higher-education-funding-cuts-have-pushed-costs-to-students

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Wednesday, April 22nd, 2020 and today’s episode covers college financial aid and was written by B|O|S Principal, Colleen Supran.

When a new year begins, most high school seniors are both relieved and anxious. While college standardized tests are behind them and applications have been submitted, the waiting seems endless as universities slow roll their admission decisions. Soon families’ focus will shift from the exhilaration of college acceptance to the reality of paying for it. College expenses can be the second largest cost incurred by most families, after the purchase of a home. Paying for college may even delay or derail parents’ retirement plans. Since the financial crisis of 2008, states have reduced funding for public universities, requiring students and families to shoulder more of the costs. According to the Center on Budget and Policy Priorities, tuition has increased 37% on average at four-year public colleges over this period of time. In a handful of states, including California, published tuition is up more than 60%. Net costs including room and board have increased a more modest 24% nationwide in the 10 years following the Great Recession.1

Competition is fierce for admission into the highly ranked University of California system, even for in-state applicants. As a result, many California students broaden their search to include out-of-state universities, but attendance to those schools comes at an even greater price. For instance, my daughter is graduating from high school in May and like so many high school students, she submitted applications to an array of universities across the country. As a planner by nature and profession, I, along with my spouse, saved for this since she arrived 17 years ago, feeling joyfully in control as we mapped out projected increases in tuition against savings and appreciation. Once comforted by our advance planning, we were dumbfounded when we learned that the annual tuition cost of college ranges from $45-$65K at competitive out-of-state public universities in states like Wisconsin (Go Badgers!) and Michigan. Private school costs can easily run $20,000 higher.

Even with these bills looming, we dismissed the idea of applying for financial aid. We have some money set aside in a tax-advantaged college savings fund, known as a 529 plan, and regular earned income so we knew that we would not qualify for financial aid based on need. We researched the financial aid process, however, and found that there are some benefits to filing the Free Application for Federal Student Aid, even for families with savings earmarked for college. We completed the Free Application for Federal Student Aid online through the Federal Student Aid office of the U.S. Department of Education. When a family submits the Free Application for Federal Student Aid, the information is provided to the schools chosen by the student on the application.

We learned that many merit-based aid programs offered by schools require the submission of the Free Application for Federal Student Aid for consideration. The reality is that even schools with enormous endowments want to admit mostly students with a demonstrated ability to pay. These schools may offer merit awards to attract the top echelon of students and to fulfill the mission of admitting promising first-generation entrants, but the vast majority of applicants will be asked to pay full tuition. Having a view into the applicant’s ability to pay can also help the university predict who will drop out because of financial hardship. Competitive universities need to maintain exemplary graduation rates, a very important metric for ranking purposes. Could our daughter be given priority by a competitive university because our family demonstrates the ability to pay? Filling out the free application suddenly seemed like a no-brainer.

The Not-So-Secret Free Application for Federal Student Aid Sauce

The key determinants of financial need are an alphabet soup of acronyms:

Cost of Attendance includes tuition, room and board, books, and other expenses such as the cost of a personal computer. This number is calculated by the university and provided to the family on the otherwise glorious day the student is accepted.

Expected Family Contribution is a formula established by law that includes the family’s taxed and untaxed income, assets, and Social Security and unemployment benefits. This calculation also takes into account the number of family members who will attend college during the year. Interestingly, it does not include home equity or retirement plan balances, but annual contributions to retirement plans are included as income.

The difference between Cost of Attendance and Expected Family Contribution is determined to be the family’s financial need. The Free Application for Federal Student Aid is available for filing between October 1 and June 30 prior to the start of the new school year so this calculation is refreshed annually.

The students most in need of aid will qualify for federal grants. The award maximum is $5,135 for the 2020–2021 school year. Universities also have discretion to award additional grant money under the Federal Supplemental Educational Opportunity Grant program. Need-based aid encompasses more than grant money, it also includes a work study job and loans. Borrowing is limited to $57,500 per year for undergraduates, but only half of this amount can be offered as subsidized loans. Subsidized loans are beneficial because the federal government pays the interest expense on these loans for students who are enrolled at least half-time. Any amount borrowed as an unsubsidized loan accrues interest expense from the first day the money is borrowed. If accrued interest isn’t paid, it’s added to the balance of the loan, snowballing the repayment burden. Certain programs also allow parents to take on loans to finance secondary education. Borrowing rates for the federal loan programs ranged from 4.5% to 7.0% for the 2019–2020 school year, but student loans arranged by private lenders can be even more expensive. With increasing costs of attendance, it’s no wonder the Federal Reserve Board reports a crushing $1.6 trillion of outstanding federal student and parent debt as of the first quarter of 2019.

Plan Early, Contribute Often

Unfortunately, there is no clandestine strategy for getting a free or subsidized ride at the student’s college of choice. The available federal grant money is just not enough to cover a big tuition bill and colleges are selective when handing out their own endowment money. With this in mind, the team at B|O|S encourages our clients to fund a 529 plan when children or grandchildren are young. The 529 plan can be used for a broad range of college expenses and balances can be withdrawn with no taxes due on the earnings. While the 529 structure is beneficial from a tax perspective, 529 plan balances will detract from a family’s demonstrated need for financial aid. If parents are the owners of a 529 plan for their child, the plan balance is included in the parent’s assets to determine financial need. If the 529 plan is owned by a grandparent or other family member, the amount used to pay college expenses each year is included as untaxed income to the student in subsequent Free Application for Federal Student Aid filings.

Value Strategies Emerging

Fortunately, strategies for keeping college costs manageable exist. In California, for example, students attending low-cost community colleges have guaranteed admission to a number of University of California schools after successfully completing roughly two years of a full load of classes. While it may not be the right experience for every high school graduate, it does offer an alternative to mitigate rising costs. And, narrowly speaking, the Introduction to Calculus textbook at Diablo Valley College, a community college located in the San Francisco Bay Area, is the same as the Introduction to Calculus textbook at Harvard. Some public universities are also creating honors colleges. These programs offer smaller class sizes and more engaged cohorts at a bargain price. This is an attractive option for those students who are looking for, but unable to afford, a private school experience. With more collaboration and imagination devoted to reducing the high cost of college attendance, someday we may return to a time when the waiting for the acceptance letter was the hardest part.

The author is a 1987 graduate of the University of Wisconsin-Madison. As an in-state resident, she paid $387 for tuition and $1,100 for room and board during her first semester as a freshman.

For important footnotes within the original article, ‘When The Waiting Isn’t the Hardest Part’, please see the show notes for this podcast.

5.  Estate Planning Strategies for Married Couples in the New Decade

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The American Taxpayer Relief Act of 2012 (ATRA) and the 2017 Tax Cuts and Jobs Act (TCJA) implemented sweeping changes to estate planning techniques for married couples.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Monday, April 20th, 2020 and today’s episode is about estate planning for married couples in the new decade and was written by B|O|S Estate Planning Advisor, Judith Gordon.

The American Taxpayer Relief Act of 2012 and the 2017 Tax Cuts and Jobs Act implemented sweeping changes to estate planning techniques for married couples. While the American Taxpayer Relief Act of 2012 made permanent the basic exclusion amount, indexed for inflation, of $5 million for an individual for federal estate, gift, and generation-skipping transfer taxes, the 2017 Tax Cuts and Jobs Act doubled the basic exclusion amount from $5 million to $10 million with adjustments for inflation after 2011. The basic exclusion for an individual in 2020 is $11,580,000. However, the 2017 Tax Cuts and Jobs Act also stipulates that the basic exclusion amount will revert to $5 million adjusted for post-2011 inflation after 2025, which equates to approximately $6 million.

The American Taxpayer Relief Act of 2012 also introduced and made permanent the concept of portability — the ability to transfer a deceased spouse’s federal estate and gift tax exemption to the surviving spouse. The applicable exclusion amount for the surviving spouse is the sum of the survivor’s basic exclusion amount and the deceased spouse’s unused basic exclusion amount or DSUE. In order to claim the deceased spouse’s unused basic exclusion amount for gift tax purposes during the surviving spouse’s lifetime or for estate tax purposes when the survivor dies, the surviving spouse must make a portability election on a timely filed estate tax return when the first spouse dies.

For the first half of the new decade — with some basic planning and a portability election — a married couple may be able to transfer approximately $23 million without triggering any federal estate tax for their heirs. Note that a number of states and the District of Columbia have their own estate or inheritance tax. Many states have lower exclusion amounts than the federal government and most of these states have not adopted a portability provision.

Without the threat of federal estate tax liability, achieving a step-up in cost basis for assets owned, in other words eliminating capital gains for income tax purposes, when both the first and second person of a married couple dies has taken on even more importance.

Let’s look at a few couples and how they might structure their estate plan heading into the new decade.

The first example we’ll look at is Joe and Amanda.

Joe and Amanda have a combined net worth of approximately $10 million, which is less than one basic exclusion amount. In deciding how their assets should pass to the survivor upon the first spouse’s death, they may consider making an outright transfer to the surviving spouse or making a transfer to a trust for the benefit of the surviving spouse. In this scenario, transfer taxes are not the driving factor but avoiding additional capital gains taxes for family members are of concern.

If Joe and Amanda favor simplicity and are comfortable with the surviving spouse having control over all of their wealth, an outright gift to the spouse may work best to achieve a step-up in basis of the assets at both first and second death.

However, Joe and Amanda might choose to use a trust for the benefit of the surviving spouse for reasons that include a desire of the first spouse to die to control the disposition of his/her share of the assets after the surviving spouse dies, providing for a trustee or co-trustee to help the surviving spouse manage the assets, and reducing the exposure of the assets to creditors.

For Joe and Amanda, income tax planning should take precedence over estate tax planning and getting a step-up in basis on assets at first death and second death should take priority. If the transfers are made to a trust for the benefit of the surviving spouse, the trust should be structured as the type of trust in which assets are included in the survivor’s estate and get an additional step-up in basis upon the second spouse’s death.

Regardless of whether an outright gift or transfer in trust for a spouse is made, at first death, the survivor should consider a portability election because it is possible that in the future the basic exclusion amount could be reduced, or the estate of the survivor could grow above the one basic exclusion.

Now let’s look at the example of Dan and Fred.

Dan and Fred have a combined net worth of approximately $15 million, which is more than one basic exclusion amount but less than two basic exclusion amounts. Dan and Fred will need to do some planning to ensure that their heirs do not pay estate tax when the second spouse dies. They may consider making an outright transfer of assets to the surviving spouse with the expectation that the surviving spouse will make a portability election or making a transfer to a bypass trust for the benefit of the surviving spouse.

Before portability became an option, the use of a bypass trust was a standard feature in many couples’ estate plan. With a bypass trust, a surviving spouse can have lifetime access to the income and to the principal of the trust for health, maintenance, support, and education. At the survivor’s death, the value of the bypass trust including all appreciation is not included in the survivor’s estate for estate tax purposes. However, the assets in the bypass trust do not receive a step-up in basis when the survivor dies. If there is a substantial age difference between Dan and Fred and/or assets owned by the surviving spouse are expected to appreciate substantially before the surviving spouse’s death, Dan and Fred may strongly consider using a bypass trust.

On the other hand, if Dan and Fred do not expect their net worth to grow significantly and are comfortable with the surviving spouse having control over all their wealth, an outright gift to the spouse with a portability election may be preferable. Or, just like Amanda and Joe, they could choose to use a trust for the benefit of the surviving spouse, in which the assets are included in the survivor’s estate and get a step-up in basis at second death.

Finally, let’s look at the example of Harry and Helen.

Harry and Helen have a net worth of $60 million. Their estate planning world has not changed. Pre- American Taxpayer Relief Act of 2012 and pre- 2017 Tax Cuts and Jobs Act estate planning strategies are still very appropriate, but they should also consider more advanced estate planning techniques to minimize the amount of estate tax due, such as grantor retained annuity trusts, qualified personal residence trusts, and sales to intentionally defective trusts.

In summary, estate plans are meant to be reviewed approximately every five years or when changes in tax laws occur. Focusing attention on current tax laws and tax-saving strategies and knowing that additional changes can be made when appropriate is generally a winning estate planning strategy.

Please contact your B|O|S wealth management team, estate planning attorney, or accountant to discuss these strategies in more detail.

4.  Estate Planning in the Time of COVID-19

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The escalating COVID-19 pandemic has many of us thinking about the health and wellness of our families. While many individuals may have a basic estate plan in place, that estate plan may need updates or revisions. For others who do not have legal estate documents, now is a good time to focus on getting documents prepared. In addition, for those who are interested, challenging times create some unique opportunities in wealth transfer planning.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Wednesday, April 15th, 2020 and today’s episode is about estate planning in the time of COVID-19 and was written by B|O|S Estate Planning Advisor, Judith Gordon.

The escalating COVID-19 pandemic has many of us thinking about the health and wellness of our families. While many individuals may have a basic estate plan in place, that estate plan may need updates or revisions. For others who do not have legal estate documents, now is a good time to focus on getting documents prepared. In addition, for those who are interested, challenging times create some unique opportunities in wealth transfer planning.

The following are some estate planning topics upon which to focus:

Topic #1 – Review Basic Estate Planning Documents

Review current estate plans to ensure that the basic documents such as wills, revocable trusts, durable powers of attorney, advanced healthcare directives, and beneficiary designations are in order and reflect your current wishes.

Assess your choices for who will act on your behalf if you are unable to manage your healthcare or your financial affairs in the event you become incapacitated or pass away and who will care for minor children. If appropriate, reevaluate the individuals and charities you’ve chosen to inherit your assets and how those inheritances have been structured.

If the documents need revisions, focus on your current wishes and remember that documents can be changed in the future. Put your documents in a safe place and let someone know where the documents are located.

Topic #2 – Track Personal, Financial, and Other Important Data

Track personal, financial, and other important data in one place. Having all of the information that a family member or other designated person will need readily available in the event of incapacity or death will be greatly appreciated. There are a variety of ways to assemble your personal and financial information including checklists, spreadsheets, or preprinted forms.

Topic #3 – Explore Wealth Transfer Strategies

Lower estate and gift tax exemptions are currently scheduled to become effective in 2026. It is also possible that the November election may bring a change in administration and a change in the gift and estate tax laws.

Some of the most successful estate plans I have helped orchestrate came out of estate planning and wealth transfer strategies undertaken during the 2008 financial crisis. Currently, lower financial markets, depressed asset values, and low interest rates present significant opportunities to transfer wealth to intended beneficiaries.

The following are some wealth transfer techniques to consider:

Technique #1 – Tax-Free and Taxable Gifting

Dips in the market trigger lifetime gifting opportunities. The annual tax-free gift exclusion of $15,000 per person per year does not count against one’s lifetime gift tax exclusion. Since the amount of the gift is measured at its current fair market value, gifting marketable securities now when valuations are down offers some extra mileage, because – BUT THOSE those gifts will offer greater value to recipients as valuations recover in the future.

The same philosophy holds true for larger taxable gifts. Gifts of assets with lower valuations will allow a greater amount of one’s lifetime exemption to remain available to offset estate taxes at death. Given the likelihood that the current high estate and gift exemptions will revert to lower amounts in 2026, and with a current estate tax rate of 40%, maximizing the estate tax exemption will be of utmost importance.

Technique #2 – Grantor Retained Annuity Trusts, which are also referred to as GRATS

Grantor Retained Annuity Trusts are financial vehicles used to leverage the gift tax exclusion amount. GRATS are often structured to use very little, if any, of the gift tax exclusion and are typically designed to transfer excess investment return without additional gift tax. GRATS are generally more powerful in a low interest rate environment.

In a GRAT, the grantor transfers assets to an irrevocable trust and retains an annuity payment for a certain term of years. The retained interest reduces the value of the remainder gift to the beneficiaries who are typically family members. To the extent that the assets inside the GRAT appreciate at a rate in excess of the interest rate used to calculate the value of the remainder at the time of the gift, the excess appreciation is transferred tax-free to the remainder beneficiaries. The applicable rate, known as the IRC section 7520 rate, in April 2020 is 1.2%, compared to 3.0% in April 2019, making GRATs particularly effective at this time.

For existing GRATS that may have declined significantly in value, there is generally an opportunity to swap out the assets in the GRAT and restart the GRAT from a lower funding value.

Technique #3 – Intra-Family Transactions

There are a few options in this category.

Transaction type #1 – New Intra-Family Loans or Refinancing Existing Loans

If family members are in need of funds, a loan may be a good way to help them. Intra-family loans can be made at below-market interest rates provided each month by the IRS. For April 2020, the rates are just 0.91% for loans of three years or less, 0.99% for loans of more than three years but less than nine years, and 1.44% for loans of more than nine years.

If done properly, existing loans at higher interest rates can also be refinanced at the lower rates. Loan documents must be properly drafted and the interest on the loan is taxable to the lender.

Transaction type #2 – Sales to Grantor Trusts

A grantor trust is a trust deemed to be owned by the grantor so that any sales of assets by the grantor to the trust are not subject to income tax. The transaction is deemed a sale by oneself to oneself. For example, parents can sell assets to a grantor trust for a child without triggering a recognition of gain. The sale can be for a promissory note, with interest payable at the minimum rates required by the below-market loan rules. To avoid an argument by the IRS that the trust is not a creditworthy borrower, it is generally recommended that a taxable gift of about 10% of the value of the asset to be purchased be contributed to the trust upon formation. The remainder of the sales price covered by the promissory note does not use additional gift tax exemption.

The sales price of the asset is determined by an appraisal and the grantor continues to pay the income taxes on the income generated in the trust. The payment of income taxes is also not deemed an additional gift. The value of the asset included in the grantor’s estate for estate tax purposes is the remaining balance owed on the promissory note and not the value of the asset held by the trust.

With current lower valuations and lower interest rates, this technique has the potential of unprecedented wealth transfer.

Transaction type #3 – Roth Conversions

Owners of traditional IRAs will likely be looking at higher income tax rates applied to both principal and growth when withdrawals from the IRAs are made in the future. On the other hand, distributions from a Roth IRA account are free of income tax.

Given that most IRA values are currently lower than they were a few months ago, making a Roth conversion and opting to pay the tax bill now, will allow the future recovery growth to go untaxed.

Roth IRAs are also not subject to required minimum distribution rules. Further, the recently passed Secure Act eliminated stretch IRAs for most beneficiaries. Instead, most IRAs inherited by non-spouses must be fully distributed within 10 years from the owner’s date of death. Converting a traditional IRA to a Roth IRA at this time will also help heirs avoid higher taxes down the road.

Transaction type #4 – Charitable Lead Annuity Trusts, which are also referred to as CLATs

In a CLAT, the grantor transfers specific assets to a trust in which a charity receives an annuity stream for a certain term of years, and at the termination of the trust, any remaining assets pass to the remainder beneficiaries.

The value of the annuity passing to the charity is affected by the IRC section 7520 rate. A lower 7520 rate means a higher present value of the annuity passing to the charity and a lower current value of the assets expected to pass to the remainder beneficiaries. For gift tax purposes, the taxable gift is the actuarial amount expected to pass to the remainder beneficiaries. Similar to the other strategies discussed here, using this technique when asset values are depressed and interest rates are lower may result in more assets passing to beneficiaries.

Now Is the Time to Plan

With additional flexibility in current work and life schedules and perhaps the time to focus on other things, now is a good time to reach out to your current estate planning attorney or interview a new one and move estate planning up a few notches on your to-do list. Attorneys are working from home and most have the ability to meet with clients over the phone or the internet.

If you are interested in learning more about any of the techniques addressed above, please contact your B|O|S wealth management team to review your financial situation.

3.  Q1 2020 Quarterly Summary

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The first quarter of 2020 was one for the history books. Over the course of three months, the coronavirus known as COVID-19 transformed from a strange new virus in a faraway place to an imminent and deadly threat within our communities. The impact of the virus has been tragic for many.

Show notes:

The full Quarterly Summary, with important disclosures, is available on the B|O|S website here.

Footnotes:

1. Source: Morningstar. The S&P 500 returned -21.95% during the 4th quarter of 2008

2. Source: Morningstar. Calendar year 2008 returns: S&P 500: -37.00%, Russell 1000 Value Index: -36.85%, Russell 2000 Index: -33.79%, S&P 500 Information Technology Sector Index: -43.14% (3rd worst of 10 sectors)

3. Source: Morningstar. The Barclays High Yield Corporate Bond Index returned -12.68% in the first quarter of 2020

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Tuesday, April 14th, 2020 and today’s episode covers a review of securities markets for the first quarter and was written by B|O|S Chief Investment Officer, Rich Golinski.

The first quarter of 2020 was one for the history books. Over the course of three months, the coronavirus known as COVID-19 transformed from a strange new virus in a faraway place to an imminent and deadly threat within our communities. The impact of the virus has been tragic for many.

In addition to the human toll, the economic fallout from the coronavirus has been severe as social distancing measures have essentially shut down substantial segments of the economy, forcing many businesses to close and lay off employees. In response to the economic shock, the U.S. government passed the largest fiscal stimulus package ever in March. The CARES Act earmarked $2 trillion to help large companies, small businesses and individuals navigate the economic strains. The Federal Reserve also took extraordinary measures, lowering short-term interest rates back down to 0%, backstopping money market funds, resuming its previous quantitative easing program and expanding QE to include both corporate and municipal bonds.

Stock markets around the world declined sharply in response to the economic turmoil and expectations that the virus will trigger a global recession. U.S. stocks, as measured by the S&P 500, registered their worst quarter since the fourth quarter of 20081, according to Morningstar, declining 19.6%. The S&P 500 previously returned negative 21.95% during the 4th quarter of 2008. Additionally, the MSCI ACWI ex US Index (a broad index of developed and emerging country foreign stocks) declined 23.4% during Q1.

While all stock sectors in the U.S. registered losses in the first quarter, large-company technology stocks generally held up better than other market sectors. A handful of technology stocks even generated gains for the quarter as demand for their services increased – Zoom Communications, a videoconferencing company, saw its stock more than double as businesses scrambled to transition to virtual meetings. On the other end – HAND- of the stock spectrum, value stocks and small company stocks lagged the overall stock market during the quarter. Relative performance of these stock sectors contrasted with 2008, the worst year of the previous bear market. In that year, according to Morningstar, both value and small company stocks modestly outperformed the broad market while technology stocks were one of the worst-performing sectors.2 Specifically, calendar year returns for 2008 were as follows: the S&P 500 returned negative 37%, the Russell 1000 Value Index returned negative 36.85%, the Russell 2000 Index returned negative 33.79%, while the S&P 500 Information Technology Sector Index returned negative 43.14%, the third worst of 10 sectors.

High-quality bonds held their value during the quarter as the yield on the 10-year Treasury note declined to all-time lows. The bond portfolios we recommend for our clients generated flat to slightly positive returns, helping to moderate the impact of stock losses on portfolio values. Our focus on the high-quality end of the bond spectrum helped as lower quality, or junk bonds, returned negative 12.68% during the quarter3, according to Morningstar.

Looking across our clients’ portfolios, the variation in returns was largely a function of the amount allocated to stocks – portfolios with higher stock allocations incurred larger losses while those with lower stock allocations registered smaller losses.

With the lack of any useful historical precedent and in the face of great uncertainty, forecasters’ estimates of the coronavirus’s impact on the economy and the stock market vary widely. The range of potential outcomes is wider than at any time since at least the financial crisis of 2008-2009.

As of April 9th, the U.S. stock market has rebounded off its low in March although it is still well below its high in February. Over the past week or so, some investment commentators have been encouraging investors to buy stocks at these lower levels. For example, a recent Wall Street Journal article titled, “It’s a Good Time to Stock Up” written by Burton Malkiel, author of A Random Walk Down Wall Street, makes this point.

In his article, Malkiel outlines some good reasons to buy stocks at the present time. For one, the sharp decline has caused investors’ stock allocations to drop below their long-term targets and one way to get back to these long-term targets is to rebalance portfolios by selling bonds and buying stocks. Moreover, given that prices are down, investors buying at current levels should expect higher long-term returns relative to the returns implied by stock prices a couple of months ago. Additionally, stocks tend to rise swiftly coming out of bear markets so a disciplined strategy of averaging-in ensures that investors captures at least some of these gains with their new purchases.

In our view, Malkiel’s advice is appropriate for some investors but not appropriate for others. The key determining factor is the investor’s ability and willingness to withstand additional stock market declines. A simple way to frame this issue is to consider how you would handle an additional 50% decline in stocks from current levels. While we don’t believe a further 50% decline in stocks is likely, it is certainly possible – a loss of this magnitude would result in a cumulative decline from the February high of about 60%, which would approximate the U.S. stock market decline during the financial crisis of 2008 -09.

If an additional 50% stock decline is unlikely to affect your investment approach or to force you to substantially change your spending plans, buying stocks at this time via an averaging-in strategy could well make sense for you. In general, investors in this category tend to have longer time horizons, the ability to tap other assets for spending needs, and the ability to emotionally accept significant investment losses.

On the other hand, if there is even a modest risk that a further substantial stock market decline causes you to abandon your long-term investment strategy or forces you to give up on financial goals you value, you would likely do well to focus more on limiting your downside risk rather than positioning yourself to capture more of the upside. At a lower equity allocation, any subsequent declines in stocks will have less of an impact on your portfolio’s value than if you had bought more stocks.

Ultimately, whether an investor should buy stocks at this time is highly dependent on each investor’s unique circumstances. What makes good sense for one investor may be inadvisable for another. In our role as advisors to our clients, we put a great deal of emphasis on understanding each client’s broader financial picture including their long-term objectives and preferences. With an understanding of the broader picture, we are well-positioned to help our clients make important financial decisions such as whether to buy stocks in a way that fits with their most important goals.

2.  To Refi or Not To Refi

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On March 3, in response to the coronavirus’ potential impact to the economy and markets, the Federal Reserve cut interest rates. This rate cut has also led to lower mortgage rates, offering home owners a chance to potentially improve their short-term and long-term finances through refinancing. However, not everyone should refinance, even if they can. Before you rush to refinance, you need to review several factors.

Show notes:

1. “Average U.S. mortgage size hits record-high $354,500 -MBA,” Reuters, March 12, 2019. https://www.reuters.com/article/us-usa-mortgages/average-u-s-mortgage-size-hits-record-high-354500-mba-idUSKBN1QU1VA

2. “Mortgage Rates Rise”, Freddie Mac, March 19, 2020. http://www.freddiemac.com/pmms/

3. Kevin Dorwin, “Should I Pay Off My Mortgage? New Tax Law Changes the Math for Some?” B|O|S, June 5, 2018. https://www.bosinvest.com/blog/financial-planning/pay-off-mortgage-new-tax-law-changes-math/

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perpsectives podcast, I’m David Newson. Today is Monday, March 23, 2020 and today’s episode was written by B|O|S Director of Financial Planning Michelle Soto, CFP®, CDFA™.

Refinancing—the silver lining to the global market downturn due to coronavirus concerns. Interest rates have dropped, mortgage rates are low, and there is a historic opportunity to refinance your mortgage to possibly lower your payment, lower your total home ownership costs, and/or shorten the term of your mortgage.

On March 3, in response to the coronavirus’ potential impact to the economy and markets, the Federal Reserve cut interest rates. The move was done outside of a regularly scheduled meeting, highlighting the urgency to take action now to boost investor confidence, prevent financial conditions from worsening, and cushion the US economy from a downturn.

This rate cut has also led to lower mortgage rates, offering homeowners a chance to potentially improve their short-term and long-term finances through refinancing. For instance, a year ago annual rates on a 30-year fixed-term mortgage were around 4.5 percent.1 They dropped over a percentage point to 3.29 percent as of March 5th2 which could translate to nearly $7,000/year savings on a $700,000 loan through refinancing. Mortgage rates change daily so be sure to review a current quote.

However, not everyone should refinance, even if they can. Before you rush to refinance, you need to review several factors.

What to Consider When Considering Refinancing

Will your rate go lower?

Review the spread between your current rate and the rate in the market. If a new rate would be at least 0.5 to one percent lower, then it would be worth looking at your refinance options.

Take into consideration that you will spend thousands on the actual refinancing. You should expect to pay somewhere between two and five percent of a loan principal in closing costs, title insurance, transfer taxes, appraisals, and any potential penalties for paying off your current loan early.

You should also factor in the time and money it will take to recover those costs. For example, if you refinance to a new 30-year loan and your monthly payment drops by only $200 (assuming $700,000 mortgage and 3.0 percent in closing costs), it will take more than 8 years to breakeven on the closing costs. However, when closing costs are low or even waived, the breakeven can be as little as 2 years. Reviewing closing costs, the potential monthly savings and the breakeven period are important consideration when evaluating whether to refinance or not.

Do you have enough equity in your home?

You should also bear in mind how much you have already paid into your house. Another 30-year loan might not make sense in the long-run as you might be paying more in interest. In addition, if you have paid into less than 20 percent of your equity, a creditor may require mortgage insurance.

Can you switch from an adjustable rate to a fixed-term mortgage?

If your current loan will start adjusting soon, what are the parameters of how it will adjust? If your adjustable-rate mortgage (ARM) would adjust to a lower rate, then you may choose to stay with your current ARM for now. On the other hand, a fixed-rate mortgage would offer you stability, making it easier to budget and provide you some protection against future interest rate increases. Bear in mind that fixed-rate loans do tend to have higher interest rates.

Can you adjust the loan term?

If you are already 10 or more years into your loan and you were to get a new 30-year loan, you would be paying more on interest over the long-run. That is because in the early years of your mortgage term, your payments primarily go toward paying off interest. In the later years, you begin to pay off more principal than interest and thus build more equity. Once you refinance, it’s like you’re starting over.

Say you’ve been paying off your old mortgage for 10 years, and you have 20 years left to go. If you refinance then into a new 30-year mortgage, you’re now starting at 30 years again. However, if you can shorten the length of your mortgage from 30 years to 15 years for a similar payment, it could result in a large overall cost savings.

How long do you plan on staying in your home?

If you plan on moving before you break even on the costs of refinancing, you might want to stay with your current mortgage.

For instance, Josh and Marina have a 30-year fixed rate mortgage of $700,00 at 4.5% and want to refinance to 3.29% like in our previous example. They bought their house in 2018 and plan to stay there for eight more years. They will break even on their refinancing costs in under three years assuming closing costs of 3%. They will also save over $40K until they sell their home eight years from now. Refinancing makes sense.

By contrast, Miguel and Noah plan to sell their home with the same 30-year fixed rate mortgage in next year so they should not consider refinancing because they will not recoup the refinancing costs.

Do you have a good credit score?

If your credit score or payment history have improved since your original mortgage, you might qualify for a rate that would result in a greater drop than just the current reduction.

Other Considerations

Given the historic low rates, lenders may be overwhelmed by other home owners rushing to refinance. Be ready to provide the necessary paperwork and data in a timely fashion.

In addition, mortgage rates are constantly in flux. Know your math ahead of time and consider locking in a rate to ensure your savings while you are completing the underwriting process.

Lastly, taxpayers may be taking the standard deduction versus itemizing mortgage interest given the changes from the Tax Cuts and Jobs Act of 2018. They may not be receiving the tax benefit of having a mortgage when taking the standard deduction. These folks may consider paying off their mortgage altogether. To review some of the pros and cons of doing this, please see a link to an article we posted, “Should I Pay Off My Mortgage” in the show notes.

Whatever your ultimate decision, B|O|S is here to help you evaluate whether and how to refinance.

Footnotes

1. “Average U.S. mortgage size hits record-high $354,500 -MBA,” Reuters, March 12, 2019. https://www.reuters.com/article/us-usa-mortgages/average-u-s-mortgage-size-hits-record-high-354500-mba-idUSKBN1QU1VA

2. “Mortgage Rates Rise”, Freddie Mac, March 19, 2020. http://www.freddiemac.com/pmms/

3. Kevin Dorwin, “Should I Pay Off My Mortgage? New Tax Law Changes the Math for Some?” B|O|S, June 5, 2018. https://www.bosinvest.com/blog/financial-planning/pay-off-mortgage-new-tax-law-changes-math/

1.  Our Perspective on this Unsettling Environment

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Mar 26, By B|O|S

Produced by Bingham, Osborn & Scarborough

The current environment is testing the nerves of even the most steady and disciplined long-term investors. Over the past month, the S&P 500 index of U.S. stocks has dropped by 32%. Economic activity around the globe has ground to a halt, the number of coronavirus cases is increasing, we are quarantined in our homes and government officials seem to be on their heels. Only the best Hollywood screen writers could have envisioned this scenario. It can be frightening and it begs the question: where do we go from here and what should investors consider doing?

Show notes:

Our Perspective on this Unsettling Environment

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perpsectives podcast, I’m David Newson. Today is Monday, March 23, 2020 and today’s episode was written by B|O|S Chief Executive Officer, Kevin Dorwin.

The current environment is testing the nerves of even the most steady and disciplined long-term investors. Over the past month, the S&P 500 index of U.S. stocks has dropped by 32%. Economic activity around the globe has ground to a halt, the number of coronavirus cases is increasing, we are quarantined in our homes and government officials seem to be on their heels. Only the best Hollywood screen writers could have envisioned this scenario. It can be frightening and it begs the question: where do we go from here and what should investors consider doing?

Planning Ahead

Before we answer these questions, it’s important to remind you of the plan you already have in place. Although few, if any, could have predicted even several months ago that a rapidly spreading virus would shut down major sectors of the economy and cause stocks to drop dramatically, our philosophy when designing a long-term plan and investment portfolio for any client is to assume that the stock market may, on occasion, decline significantly for reasons that are largely impossible to predict in advance.

We aim to build client portfolios with these declines in mind from the very outset of our relationship. We do this in conjunction with a careful understanding our clients’ overall objectives, risk tolerance, time horizon and spending levels. Our intent is to position our clients’ portfolios so that they have a reasonable probability of meeting long-term objectives even in the face of stock market declines.

To prepare for and to reduce the impact of severe stock market declines, BOS takes a comprehensive approach. First, with the knowledge that the stock market is inherently risky, most BOS clients typically hold high-quality bonds in their portfolios to provide stability. Despite the recent market declines, bonds have generally held up well relative to riskier assets. As of this writing, high-quality bonds are generally flat to modestly negative. Second, as the stock market has risen substantially over the past decade, we have typically “rebalanced” portfolios by selling stocks and buying bonds to keep portfolios close to their “target” allocations and risk levels. Third, as a result of our experience in prior market downturns, particularly the bear market of 2008-2009, we favor high-quality bonds and we generally include little, if any, junk bonds, low credit-quality bonds or highly illiquid assets in client portfolios. In times of stock market stress, these types of assets typically have high correlations with the stock market. That has indeed been the case in the current downturn – for example, junk bonds, as measured by the Bloomberg Barclays High Yield Bond Index, have declined 18% so far this year. Finally, through a sharp focus on each client’s overall financial picture, we advise clients on appropriate levels of spending to help them meet their most important objectives and we look to help clients identify ways to reduce risk in other aspects of their financial lives.

Thus, much of the important planning in a down market comes well before it actually occurs. That said, we want to shift focus to where the stock market may go from here and to what you and we can do to improve your chances of having a positive long-term outcome.

How Far Will the Market Go Down?

The short answer is that we don’t know and no one can know with any level of certainty. The impact of the current coronavirus outbreak on the overall economy is a fluid situation but there are some things we can reference to give us reasonable expectations. These include looking at potential best and worst case scenarios, examining what history tells us about market downturns and analyzing what various market data is telling us.

Best and Worst Case Scenarios for the Stock Market

The best case scenario at this point is that, through discipline and successful quarantine efforts over the next month or so, the spread of the coronavirus levels off and then begins to slow. Moreover, efforts to stabilize the economy through massive liquidity injections, stimulus and relief for unemployed workers and impacted businesses proves effective in the short-term at stabilizing the economy. In this scenario, the stock market may have already faced the worst of its declines and may be close to hitting its bottom. The stock market is usually anticipatory and advances ahead of any economic recovery. To the extent progress is being demonstrated to move beyond the coronavirus scare, the stock market could rally in the near-term.

The worst case scenarios is far worse: the virus continues to spread, takes far longer than anticipated to slow down or resurfaces again in the future. Economic activity stagnates for much longer than anticipated and we enter a deep and long recession. Millions of Americans are unemployed and fear continues for many months to come. Similar to the 2008-2009 market decline, the total stock market decline reaches 60% or more from the recent high. Economic activity is slow to rebound and the stock market takes many years to recover. Of course, the worst case scenario could be even worse than outlined here – there is no way of knowing for sure.

History as a Guide / Putting this Decline in Perspective

If history is any guide, the outcome will likely fall somewhere in between. Considering the 14 bear markets in the U.S. since 1929, the average decline of the S&P 500 was 39%. But this time is very different, right? Yes, this situation is absolutely different but most major market declines are a result of something that seemed very different at the time. The stock market is a very volatile place and that has been forgotten over the past decade as the stock market has risen. While the current 30%+ decline is frightening, we often see very significant declines in the stock market. Please see the link in our show notes for a link to a chart, which shows the intra-year market swings in the stock market, demonstrating just how volatile the market can be.

US-Markets-IntraYear-Gains-and-Declines-vs-Calendar-Year-Returns
Source: Dimensional Fund Advisors

Now, let’s take a closer look at the stock market decline over the past few months. It is definitely severe.

Our-Perspective-on-this-Unsettling-Environment-Yahoo-Finance-Data-1

However, let’s put this current decline into a longer-term perspective. The stock market has essentially given up its gains of the past few years. Longer-term investors over the past 30 years have achieved very strong growth even though there have now been three major market declines (2000-2002, 2008-2009, and 2020). Earning attractive long-term returns requires tolerating these types of events every decade or so.

Our-Perspectuve-on-this-Unsettling-Environment-Yahoo-Finance-Data-2

The Importance of Long-Term Discipline

So, wouldn’t it just be better to get out now and get back in when this is resolved? We don’t think so for several reasons. First, returns for balanced investors are typically very strong in the years following a crises and we’ve added a link to another chart in our show notes that demonstrates this.

The-Markets-Response-to-Crisis
Source: Dimensional Fund Advisors

Moreover, it is extremely difficult to time the market. Stock market recoveries can happen quickly and when least expected. Those investors who miss the best days are likely to reduce their long-term return potential.

Reacting
Source: Dimensional Fund Advisors

Key Market Metrics

Can the stock market go to zero? Will the stock market fall as much as in the Great Depression (over 80%)? These are some of the questions on investors’ minds.

While we don’t know where the bottom of this bear market will be, we do know that the stock market is comprised of companies that will continue to provide important products and services to all of us going forward. Once the coronavirus risk subsides, we will drive our cars, drink lattes, eat out at restaurants, improve our homes, and do many other things. Publicly traded companies will continue to seek to earn a profit and deliver value to their shareholders.

At some point, the stock market should stop going down as investors shift from protecting the downside to looking to capture return opportunities. Although impossible to predict, one could argue that we may be approaching that point. Price-earnings ratios have dropped to much more reasonable levels in the US and they are downright cheap in many other areas of the market (value stocks, foreign stocks, emerging markets, etc.). The current earnings yield on stocks at over 6% (while likely to be revised downward as some companies cut their dividends) is extremely attractive relative the yield on most high quality bonds.

What Can I Do and What Is BOS Doing?

What should you do?

In our experience, the best advice we can give is to stay disciplined as hard as it may feel right now, and it is very hard. Use your income, cash balances or bonds to support your living expenses while your stocks recover. Most clients’ stock allocations are well below their target allocations. If you don’t have the stomach to consider buying again, we encourage you to hold on to what you have. And, if you have real concerns or are really not sleeping at night, consider selling a little bit of stock now to avoid the temptation to sell if things get even worse. Be sure to get away from the barrage of bad news for periods of time and, to the extent possible, spend this time you now have at home doing some of the things you enjoy or have not had time to pursue.

What is BOS doing?

BOS is working hard at this most difficult time to do what we can to help you. This includes, among other things, closely monitoring financial markets and the different investments in client portfolios, looking for opportunities to tax-loss harvest (capturing valuable tax losses to reduce your future tax burden), working with you to determine whether you have sufficient cash and liquidity to ride out this storm, devising customized approaches to rebalance or alter portfolios depending on your needs and preferences, reforecasting long-term financial plans to provide perspective on long-term spending plans and looking for opportunities to reduce debt levels, where appropriate, and refinance mortgages at lower rates.

Hope, Ingenuity and the Human Spirit

We can never know anything with certainty and we do not know how this story will end. However, despite the difficulties of comparing one situation with another, we have found history to be a reasonable guide. At the end of the day, America is a creative, hard-working and resourceful country. We have overcome many extreme challenges. We all have tremendous incentive to get back to a normal life. This gives us hope for a promising future.

Hang in there, stay safe and be with your families at this important time. We are here for you.

Sincerely,
B|O|S

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